WARNING: The S&P 500’s Worst Month Is Coming — 5 Stocks to Own Now

Tonight, Nvidia reports earnings. And by the time some of you watch this, one company may have moved hundreds of stocks across the entire market. But today's episode is deliberately not a prediction about one earnings report. Because whether Nvidia initially rise or falls, the larger problem facing investors is going to remain exactly the same. We can see the market is expensive, investors are heavily positioned, treasury yields elevated, and we're approaching what has historically been the weakest month of the year. Now, look, that doesn't mean the market must crash in September. Seasonality, that's a tendency, not a timer. But it does mean that blindly buying the index at any valuation may no longer be the most attractive decision. So, in today's episode, I've selected five very different companies that I would consider ahead of simply just buying more of the S&P 500. And one of them today appears expensive until you understand is hidden AI business. One, in fact, collects rent from casinos. And one has a record defense backlog, but may fail my valuation test. And the final stock, well, it's been sold off because investors fear Elon Musk could disrupt this industry. But my valuation suggests the market may have made its clearest mistake with that company. And before examining the stocks, let's listen carefully to this warning from Bank of America. She isn't predicting a crash or saying equities cannot rise. Her point is that the easy decision of buying the index without considering its price, well, it's now become considerably more dangerous. But if if you do 10% for next year, you'll only get to where we are right now, >> right? >> Well, okay. So, when we do our year end or our year ahead, we think about where the market is currently, what the fair value is. Even today, some of our models that are based on returns are suggesting a higher year-end target than where we are today. I just think that now is not the time to buy the index and close your eyes. >> And that distinction is crucial. She still believes the market can finish higher. The warning is about price concentration and selectivity, not abandoning equities completely. Now, the bullish case itself not difficult to understand. S&P 500 earnings momentum is reportedly at its strongest level since at least 2011. And then when we take a look at earnings, well, tech in particular, the earnings growth is accelerating towards extraordinary levels. But the higher the growth becomes, the more demanding the comparison becomes next year. And at the same time, we have the S&P 500 price to sales ratio above the peak during the dotcom bubble. Today's businesses, they are in fact more profitable than they were in 1999. So this is not a direct prediction of the exact same outcome. But what it does do is shows how much future success is already reflected in market prices. When expectations become this elevated, excellent results can merely justify the current valuation rather than drive another major rerating. And you can see that asset managers that are also carrying historically elevated net long equity exposure is not automatically bearish, but it means there may be less unused buying power if ultimately we get some disappointing news. and something we've been covering for a while now at Treasury yields. The 10-year Treasury yield that sits around 4.7% while the 30-year yield that's above 5.2. So stocks, they're competing against a meaningful risk-free return. And it's why this next observation matters. Jim Pollson argues that both corporate earnings and investor positioning, while they've used a considerable amount of their available capacity, >> say maybe we're losing some of the thrusters of this market. What are you focused on? I think so. I think uh what bothers me about the stock market a little bit I guess is I think it's used up a lot of capacity and then we're starting to put some pressure on it. I think that you know just quick on capacity if I if I look back to 1950 the price level of the S&P 500 to its trend line average it's 60% above that the earnings on trailing 12-month basis are 60% above trend line. the price level being that high is only that higher at the top of the dot and earnings have never been that high above uh trend line levels. >> So his conclusion is not that a collapse begins tomorrow is that the margin for disappointment has become unusually small and since 1948 September's produced an average S&P 500 decline of around.7% making it the weakest month in this particular data set. And then if we look at a more recent period, in fact since 1990, it produces a very similar message. August and September, they're the only two months with negative average returns. Now, the market is also recorded five consecutive positive month ends. Again, that's not a sell signal, but it demonstrates how far momentum's already carry prices with the VIX future curve showing traders already demanding more protection further into the election period. Spot volatility looks calm, but the curve is pricing greater uncertainty ahead. But I'd say more importantly than that, AI and nonAI stocks, they've developed a deeply negative correlation. It suggests the market may not be collapsing. Capital may be instead rotating away from yesterday's winners. Where the month-to- date heat map makes that rotation visible, some former leaders are weakening while less fashionable areas, they're beginning to outperform. And Bank of America's suggested response is not to panic and move entirely into cash is to become more selective, more concentrated on businesses where the fundamentals and valuation provide better protection. >> I think >> September 1st, >> the risk is just being in the index and being complacent. You know what I love as a protection against downside in the S&P large cap value and there's a bunch of tech in it. It's not just boring old economy stocks like energy and financials. Tech is large cap value now. And I that's why I like tech. That's why I like a lot of these areas of the market that have gotten a little bit more rational. >> And that's the balanced approach I'm taking. Buying near record highs has historically still produced strong long-term returns. I'm not attempting to time one week month. In fact, I'm asking a very different question. If I had new money today, which individual companies offer a more attractive combination of quality, growth, and valuation? Now, before we dive into those five stocks, I just want to let you know I've released my latest weekly article. We ran through 29 stocks near 52e lows and four which I consider buying opportunities. Now, you can click on the pin comment below, read all of these straight away, but every week we dive into severely undervalued stocks as well as what's gone in the market in the last few days. Now, stock number one, it is Alphabet and it's trading around $346. Is up only around 11% year to date and it remains around the mid to upper end of the 52- week range. All-time high sitting at $49, where Wall Street do consider this a strong buy, seeking Alpha giving it a weaker buy at 4.1 out of five. And over the last year, while the company's performed fairly well, up 66%. But Google is not obviously a cheap stock, we can see from simply safe dividends, they have the forward P around 26 and a half times above the 5year of 22. So this although we don't look at things in isolation, could be considered a potential overvaluation signal for which when we look at the blue tunnel which highlights fair value intrinsic price most of the time in the last 12 months, this one has been trading at a premium. Look at the last 5 years tells a very different story. Alphabet for the vast majority of the last five it actually traded undervalued. And if we go back to look at see alpha data well it has the forward pier sitting around 17. Now the difference here exists because alphets reported earnings it was heavily influenced by unrealized investment gains. So for the valuation, I'd focus more closely on the normalized 2027 estimate where the stock as we can see trades close around 23 24 times expected earnings. And the fear surrounding Google has been that generative AI will replace traditional search, destroy the advertising model, and turn Alphabet into the next disrupted incumbent. But in fact, their latest operating performance tells a very different story. Google services revenue increased 15% while operating income increased 20 where search advertising revenue increased 17% to 63 billion. YouTube advertising increased 13% subscriptions platforms devices that increased 15. So far AI has actually expanded engagement and monetization rather than destroying the core business. It doesn't eliminate long-term disruption risk, but the disruption is not visible in the current numbers and Alphabet's operating income increased 30% to 40.8 billion. It demonstrates that this remains one of the most profitable businesses ever constructed, but search is no longer the most interesting part of Alphabet. Google Cloud revenue increased 82% to 24.8 8 billion with their cloud backlog reaching 514 billion increasing by more than 50 billion in just one single quarter and the actual cloud operating income that more than tripled to 8.8 billion while the operating margin increased from 20.7% to 35.6 and we also have some external forecast expecting cloud to become an enormous proportion of Alphabet's future operating profit. Now, this isn't company guidance, so I wouldn't place it directly into my base case. But what I would say is the backlog provides genuine evidence that the enterprise demand is extending well beyond one quarter. And the overlooked opportunity is Google's tensor processing unit TPU. Google began recognizing revenue from external TPU system sales for the first time during the second quarter. and Morgan Stanley. They've estimated that firstparty TV revenue could reach 84 billion in 2027 and 108 billion in 2028. Now, these are extremely aggressive external forecasts, not Alphabet guidance. They should be treated as upside optionality rather than guaranteed revenue. But what this does do in fact is illustrate the scale of what the market may be missing. Google's no longer using custom silicon solely to reduce its own computing costs. It started selling compute TPU systems to custom data centers and management expects only a small proportion of existing TPU agreements to be recognized this year with the vast majority coming in 2027. Now the risk is that capturing this opportunity is exceptionally expensive. Alphabets accumulated around 811 billion of purchase commitments in this external estimate and quarterly free cash flow fell to negative 5.9 billion because second quarter capital expenditure reached just shy of 45 billion. If we're looking at trailing free cash flow, well, that remains positive around 53 billion, but it has also fallen materially from the previous annual peak with management increasing 26 capital expenditure guidance to between 195 billion and 205 billion. And they expect another significant increase during 2027. So the crucial question for Alphabet is therefore not whether demand exists, cuz it clearly does, is how much of the demand will eventually become free cash flow for shareholders. Now my discount and cash flow model assumes that free cash flow eventually recovers and compounds around a 14% rate. We use a discount rate of 8% terminal growth of 3% and it produc a value of $323. Now at around the current market value we can see here it actually notes the stock today is around 6% above my central estimate rather than actually being meaningfully undervalued. With Wall Street in fact they're a lot more optimistic. We can see an average price target $428 implied upside around 23%. But honestly, I'm not just going to buy a company simply because analysts see upside. My verdict for Google is hold at today's price, begin accumulating around 320 and become much much more interested below $300. The attraction is not that Google is obviously cheap. Is that search remains strong while cloud and TPUs could create an entirely new profit engine. But Google, it doesn't manufacture these advanced chips themselves. And that leads directly to the second company. Whether Nvidia, AMD, Apple, or Google wins the next stage of AI, many of those advanced chips still pass through Taiwan semiconductors factories. And TSM trades $417 is up around 37% year to date. So unlike several other stocks in the episode, it's not near it 52-W week low. In fact, it's trading towards the upper end of the 52-W week range. Alltime high sitting $479. We get a strong buy from Wall Street, four out of five from C alpha. And this is a company that like Google's performed fairly well over the last year, up 77%. And it's pure play foundry market share. It reached around 72% in the industry estimates. The next competitor, it remained in single digits. And we can see the dominance for TSM. It produces extraordinary economics. Gross margin that sits at 64%, EBIT margin 56% and net income margin sitting around the 50% level. return on equity that's also very strong at 40%. This is not simply another sick or manufacturer is one of the most strategically important and profitable businesses in the world. Their second quarter in fact reached 40 billion. Management's third quarter guidance calls for between 44.6 and 45.8 billion. And their current revenue growth that exceeds 30% while Ford estimates points to around 37.6 and earnings per share to grow around 46%. And just in their latest quarter, they reported 68% gross margin, up from the trains for one month figure, 60.3% operating margin. And quarter 3 guidance remains exceptionally strong despite overseas factory dilution. And even the Arizona operation previously feared as a structural margin drag that's begun contributing positively to both revenue and reported net profit. And unlike many capital inensive companies, TSM carries considerably more cash than debt, giving it the financial capacity to fund enormous fabrication projects and global expansion should make the supply chain more resilient. But overseas, FAB remains more expensive than manufacturing in Taiwan. The largest risk continues to remain geopolitical. No spreadsheet can fully model the potential consequences of a serious conflict involving Taiwan. So this risk is precisely why TSM may never receive the same valuation investors would award an identical business located entirely inside the US. And sitting around 21 times Ford earnings, TSM is trading pretty much in line with their 5year average rather than let's say a very obvious discount. Using the blue tunnel as well, we see it firmly sitting in the middle, hence that reasonable signal. Over the last 5 years, this one's traded both at a premium and undervalued and sometimes trading in a reasonable signal. Now, my base ETF assumes 15% free cash flow growth. That's considerably below the 5year KGER of 34% and their 10-year keer of 25. And using this middle, what I would say probably on the more conservative side, we get $433. At the low end, 10%, $311. And at the higher, more aggressive 20%, we get $603. So, we can see based on this range nearly $300 to $600, how sensitive the valuation is. And using that base case, we get around 4% in terms of a margin of safety. In fact, when we look at the reverse DCF, well, it suggests the market already expects around 14 to 15% growth. So my verdict for TSM is accumulate rather than buy aggressively. I'd prefer the stock below 380 and consider approximately 340 to 350 as a compelling entry. Now, the third company, it couldn't be any more different. VG properties as we can note here pretty much fallen to around 52- week lows around the $26 mark. We get two buy ratings. Wall Street 4.2 respectable. See Alpha very close to the 4 and a half to flip this into a strong buy. Year to date not great down 7% over the last year. It's lost around 1/5if of its market cap down 22%. And interesting to see this is a company that's yielding near 7%. and investors. They're worried about falling Las Vegas visitor numbers, weaker consumer spending, and pressure on casino operators. And we also have headlines surrounding lower Canadian tourism and increased travel costs. They've also added to the fear. But Vichi is not a casino operator. It's the landlord collecting contractual rent from the companies which are operating those properties. I mean, Vichy, in fact, owns 103 experiential assets including Caesar's Palace, MGM Grand, and the Venetian. The portfolio, it contains around 130 million square ft and 66,000 hotel rooms. With the portfolio 100% occupied using triple net leases, meaning tenants generally pay property taxes, insurance, and maintenance where the weighted average lease term is almost 40 years. 88% of rent carries parent guarantees and 82% that's protected through master leases. And the structure makes near-term rent considerably more stable than casino revenue. A week tour is a month. It doesn't automatically reduce Vich's contractual rent. However, what's worth noting is that Caesars's represents around 38% of annualized cash rent while MGM that's around 32%. So that means roughly 70% of Vich's rent comes from only two tenants. Triple net leases protect cash flow until a tenant experiences genuine financial distress. Now the properties are missionritical assets that would be extremely difficult to replace which provides meaningful negotiation protection. But the dividend safety score, it's only 50 classified as borderline safe. It prevents me from presenting the 7% yield as completely risk-free income. Now, the adjusted FFO payout ratio funds from operation that sits around 72 to 74% that remains manageable for real estate investment trusts and management expects 2026 FFO of between $245 and $247 per share. It represents continued but relatively modest growth where we can see that comes in around 4% year-over-year. That was 5.3 on both cases. They're actually significantly higher than what we can see in comparison to the sector. Now net debt to EBIT DAR that remains around 5.2 times while total debt was around 17.2 billion at the end of the second quarter. So leverage is the main reason higher long-term interest rates have placed sustained pressure on the valuation. So Vichi it yields around 6.85%. 85% compared with a 5year average of 5.31. It's forward PDFO ratio that sits at 10.5 versus a 5year average of 14. Both of these are signaling severely undervalued yield at its highest from the data set. Forward PDFO lowest again from this 5-year data set. And my three valuation methods, well, they produce $327 on the DCF model, 3636 on the multiples valuation, 4140 on the DDM. And when we take a look on a blended approach, well, we get to $3661. Now, you can probably argue that's too optimistic while long-term yields remain elevated and that perhaps a more conservative fair value range is around $32 to $33 close to Wall Street's $ 3250 price target. So, if we look at where Vichi sits today around $26, that still offers around 22 to 26% potential upside before including the dividend. So my verdict for Vich is a buy provided investors accept slow growth elevated leverage and significant exposure to both Caesars and MGM. The fourth company we have is L3 Harris a defense contractor trading pretty much at 52- week lows and that's after declining around 11% year to date over the last years also down around 5% and we get two very respectable buy ratings from Seek Alpha Wall Street. both in fact near the 4 and a half strong by rating and on the surface this looks like an obvious opportunity. Earnings have beaten in four consecutive reported quarters. Forward EPS growth is estimated near 20% while long-term EPS growth expectations they're also sitting around the 20% level. So it looks like both share price and operating performance they appear to be traveling in completely opposite directions. and second quarter revenue increased 8% to 5.9 billion while diluted EPS increased 28% to $3.13 and their orders reached 7.3 billion creating a bookto ratio of 1.2 two times and pushing backlog to a record 42 billion where operating cash flow and free cash flow both increased 37% reaching 879 million and 7771 million respectively mander in fact they also increased their 26 revenue and EPS guidance fundamentally this is not a business deteriorating alongside the share price the weaker points for this company is the returns on capital their leverage following the Aerojet rocket dine acquisition and the unpredictable timing of government contracts. And then when you take a look at revenue as well as EBITRA, both in fact, when we take a look on a year-on-year basis and full comparative, well, we can note they're actually below parts of the wider sector despite being well above their own historical average. So investors must also account for changes in defense spending priorities, fixed price contract risk, and potential delays in government payments. Yes, the backlog produces visibility, but backlog is not identical to immediate revenue or immediate cash flow. And despite sitting near a 52- week low, L3 Harris trades around 21 times Ford earnings. That's above the 5year average of 17. Although we can see the yield pretty much sitting in line. And this therefore gives us the slight overvaluation signal potential. Price sitting above the upper end of the fair value over the last five, over the last 10 years. This is a company that's done it all. traded at a massive premium, traded in a severely undervalued level, as well as trading at a reasonable signal. Now, the Graham's valuation comes to $247, the multiples valuation 250, and the DDM coming in at 265. Only the DCF here produces a dramatically higher value of $410 and that's using an 8% growth rate as we can see here with the reverse DCF coming in at 3%. So, in fact, the DCF pulls a blended value to $293, but the other three methods average only around $254, which is approximately sitting at today's price. Wall Street, while they see substantial upside with an average price of $342, implying 30% upside, but based on my numbers, L3 Harris is not the obvious bargain that the chart initially suggests. My verdict would be a hold around $260, interesting below 240, and very compelling around 220 to 230. And the final stock is T-Mobile. Shares have fallen around 30% from their 52- week high as investors worry about slower growth and a new threat from Elon Musk. And SpaceX ambition to expand from satellite broadband into direct mobile connectivity. It sounds like a potentially devastating competitive threat. Ant T-Mobile's chief executive. He argues that this threat's been exaggerated because satellite networks cannot currently replicate nationwide terrestrial coverage, indoor reliability, and seamless mobility. With Bank of America, they in fact do go one step further. They suggest SpaceX may ultimately require more spectrum, tower infrastructure, and established operating partners. And SpaceX current cellular spectrum is limited. Using identical spectrum for terrestrial and satellite services creates interference and capacity trade-off and T-Mobile disclosed that satellite represented only around 0.003% of network usage during the busiest summer months. So it doesn't mean Starink can never become a major competitor. Technology develops rapidly and dismissing Elon Musk completely that would be dangerous. But today, satellite connectivity looks more like a complimentary service for remote coverage than a complete substitute for T-Mobile's national network. Now, the business itself is down around 11% year to date. Over the last year, down 28%, trading very close to 52- week lows. First time today, we get a triple buy rating right across the board. Ant-Mo's also expanded its post-paid customer base much faster than AT&T or Verizon over the period. And in their latest quarter, their revenue increased 8% to 23 billion. Postpaid service revenue increased 13% while total service revenue increased around 9. And their core adjusted EBIT Dart that increased 12%. The business generated an industry-leading adjusted free cash flow margin of around 25%. And Mandrin expects around 8% fullear service revenue growth and around 10% core adjusted EBITDAR growth. That's at the midpoint with consensus expecting EPS around $11 this year, $14 next year and at today's price 2027 for repeat that sits around 13. And another thing to note is that management's raised adjusted free cash flow guidance between 18.4 to 18.8 billion. And T-Mobile also repurchased another 2.5 billion of stock in Q2 through to July 17th. And in fact, since the buyback program began in late 22, it's repurchased 253 million shares and reduced the outstanding share count to around 1.07 billion. Now, in terms of valuation, T-Mobile trades around 14 times Ford earnings compared with the 5-year of 20. The yields also risen to 2.3 on both accounts. We're looking at a possible double undervaluation signal. Well, when we look on the blue tunnel, we do get the undervaluation signal here. Look at the last 5 10 years. It's traded again like many today in all three different cases. And my model produces a value of $248. That's using only 2% explicit free cash flow growth, which we can see projects around 37% upside. Reverse DCF, well, that's not even positive. That's negative. And margin of safety today comes in around 27%. And that's also before considering dividends and continuing buybacks. And Wall Street, their average target, $243 implies around 34% upside. So my verdict overall it would be a buy. So ranking these five strictly by today's riskadjusted opportunity. L3 Harris comes fifth. The business is performing extremely well but most of the valuation methods they say is currently fair value. Google comes fourth. Search and cloud are performing brilliantly while TPUs offers enormous optionality but the capital spending requirement. It leaves the stock slightly above my central valuation. In third place TSMC. It may be the highest quality business in the entire group, but its current price, it already assumes around 14% long-term free cash flow growth. Vichi comes in second. The near 7% yield and depressed P to FO multiple, they're very attractive. Although the debt and tenant concentration, it prevents it from being risk-free. Ant-Mobile ranks first. The market's pricing declining cash flow even as service revenue, EBIT, DAR, and customer value continues to grow. Now, none of this means the S&P 500 must decline in September. It means that valuations matter more when expectations, positioning, and interest rates are already elevated. So, rather than predicting one Nvidia report or attempting to time one month perfectly, I'd focus on businesses where the price leaves room for something to go wrong. For me, T-Mobile and Vichy currently offer the clearest discounts. TSM is an accumulation candidate, while Google and L3 Harris require slightly lower prices before becoming aggressive buys. But let me know which of the five you believe offers the best opportunity and whether you're buying before September or waiting for a better price. Don't forget, as always, to sign up to the weekly newsletter. Click on the pin comment below. You can read these straight away. More importantly, have a great day. I'll see you all on the next