Stocks Are Bouncing — My #1 Buy Before Earnings

Stocks are bouncing before the opening bell, but the biggest test is still ahead. Whether earnings justify these prices, and today I'm ranking five companies, including the one that I put first on my buying list. But let's just take a look at the damage underneath the rebound. Semiconductor equipment stocks. They suffered heavy weekly losses. Investors are questioning how the AI buildout gets financed and how much profit eventually reaches shareholders. I mean, we've seen this and it just continues to get worse. This is the draw down of stocks in the S&P 500 from their 52- week high. Remember though, very, very important, a falling share price, it can leave a business attractively valued, it can leave them fairly valued, or it can still leave them expensive. And across today's five companies that we've selected, we're going to see why the difference matters for your next decision. We're going to count down through an industrial payments, financial technology, and enterprise software before reaching my first choice. Each has an earnings catalyst approaching. And I'm going to explain the valuation and the result that I want to see. Now, this is a rebound that we're seeing in the pre-market. So, prices can obviously change after the opening bell, but easing oil prices and treasury yields, they've helped sentiment this morning. Earnings will determine whether that improvement has stronger foundations. And the time frame matters. We've got several stocks suffering sharp recent losses, but they still have substantial gains this year. Yes, a painful week. It can unwind enthusiasm without automatically creating a bargain. We need to check the starting valuation. And looking over the month, the picture becomes more mixed. We've got capital moving between companies and sectors to the same market headline. It can hide very different shareholder experiences, which is why we're examining five individual opportunities today. And this chart puts pullbacks within the longer advance corrections. They occur repeatedly. The question now is whether current weakness remains manageable or starts doing more lasting damage to the broader trends that investors have enjoyed. and semiconductors are central to that question because of their importance to AI. Katie Stockton explains the technical picture, including why a rebound can coexist with weakness beneath the major indices. Let's listen to a qualification. >> When we look at the ratios and we look at the stocks themselves, we don't have breakdowns with the downdraft that we just saw. So thankfully support levels are still intact and now we have these short-term exhaustive signals. So it feels all right to us. albeit a little tenuous just given that loss of breath and momentum. We would say that there has been a seasonal correction even though it doesn't really show in the major indices. And if you look at something like the percentage of stocks above their 50 days, I mean that got down to 21% which is what we saw at the March low. So it's pretty wild. >> Her point explains the disconnect. The index can look resilient while individual shareholders experience serious declines. support holding that would be encouraging but a technical bounce it leaves us need to assess the businesses underneath and we've got the bullish argument right here the latest update from fact set it puts blended third quarter earnings growth around 29% that combines reported results with estimates for companies still to report. So the aggregate earnings picture it still remains strong where the overall market's forward earnings multiple sits around 19 close to the 10-year average is a useful perspective alongside the technology selloff that we saw. The key is whether the earnings forecast underneath that valuation can hold up. Now valuations also vary across indices. The NASDAQ carries a higher multiple than the equal weight S&P. So investors therefore have different starting points before considering individual companies and the durability of their expected growth. Now the qualification we've got a forecast showing growth slowing across most sectors from the second quarter to the third. So yes profits they can keep rising while growth moderates which that can still disappoint investors paying for stronger performance. And we can see here substantial concentration. Micron and Nvidia together account for 36% of expected index earnings growth. Now these in fact as we can see they are contributions to additional earnings rather than their share of total profits and the concentration explains the sensitivity to technology headlines. Strong growth is real but expectations they depend heavily on several powerful businesses. Their guidance can influence sentiment far beyond their own shareholders during earning season. Then comes spending. Capital expenditures increased dramatically across these four hyperscalers. Free cash flow has been squeezed. The final two quarters now on the chart. They are forecast, but it shows the pressure that analysts are expecting as the spending increases. And we can see Goldman Sachs with their analysis. It highlights timing. Infrastructure spending boosts earnings at suppliers while depreciation builds at the buyers. The forecast here has that net contribution weakening towards 2028. That is a forecast about the contribution to earnings growth. And you can see the comparison here. It shows why cash flow definitions matter. Operating cash flow, it can look healthy. While investment reduces the amount left over, the return earned on that investment, it becomes increasingly important to the shareholders outcome. And then look at the upper right image here. For the five companies listed beneath it, that's Amazon, Google, Meta, Microsoft, and Oracle. Consensus forecast put 2027 spending above a trillion dollars with combined free cash flow negative. Now these are estimates. Obviously individual companies they are going to differ but negative free cash flow during expansion it raises a financing question. A company may have ample resources yet shareholders still need to judge when the spending produces sufficient additional cash. Funding capacity alone it doesn't answer that. And then you can see on the upper left panel here, more pronounced credit concerns around Oracle. More expensive funding changes the returns that projects must in fact earn. It makes investors more sensitive to disappointments in demand pricing or the time needed to build capacity and demand. Well, that deserves equal attention. We've got reported figures putting Anthropic's quarterly revenue at around 17 billion compared with 5 billion in March. Now the figures here worth knowing they are unawited but they illustrate how rapidly this market has expanded within months and obviously the bubble debate it reflects these competing forces. Demand is expanding rapidly while investors they question prices financing and future returns. A headline cannot resolve the argument we have to connect the spending to the economics. And we've got Gil Lura who argues that slowing growth at one provider doesn't establish that the wider opportunity is disappearing. We're going to listen to his demand thesis. Then we'll connect it to the investment decisions we actually need to make. >> That this is not spell the end of days for the AI trade. Why don't you lay out your thesis? >> Yeah. I go back to basics at a time of great volatility like this. First principles. Am I using AI models more than I've ever used them before? Am I paying more than I've paid for them before? Are [snorts] people in my professional personal circles using the models more? Are they paying more for them? Are we likely to pay even more next year? If that's all right, that means AI investments are going to continue. And that's good for your Microsoft, your Amazon, and Google because they're going to be the ones serving it. >> So continued adoption can support further investment. Shareholders still need to consider the price of delivering that growth, including depreciation, growing demand, and attractive returns. They belong in the same analysis when deciding what to pay. And you've also got oil that adds another complication. We got an analysis here from Morgan Stanley. It estimates a large inflation effect from a persistent increase than a temporary one. Now, it's a conditional model, but it explains why sustained energy pressure, it could keep interest rate concerns alive. And we've also got financial shares they've experienced sustaining pressure, it matters to our financial growth stock later. The historical comparison is striking, but the length of a losing streak, it can't establish how sound an individual bank is. Well, we also have Black Monday comparisons they're circulating on the anniversary. Now, keep history in perspective. October 19th is just a calendar date. Today's decisions need to rest on current earnings, financing conditions, and the prices that are available to investors. And you've also got optimistic views that weakness is creating opportunities that deserves examining stock by stock. A strategist can frame the debate while our valuation work. It determines which opportunities deserve priority at their current price. This calendar provides an immediate test. We've got the chart measuring index weight reporting each week around 12% falls this week followed by a much larger 38% next week. More evidence is about to arrive and Meta and SAP are important reports this week. I want to hear whether demand remains healthy, costs are controlled and management expects that combination to improve cash generation. Those answers will inform today's valuations where we've also got Visa and SoFi following on October 27th with Caterpillar on 29th. This countdown gives us decisions and a checklist to revisit as the companies report. There are opportunities here, but also alongside some demanding expectations. So, I ranked the five by their overall long-term opportunity, weighing valuation, business quality, and risk. The size of the draw down matters, but it doesn't settle the order. Fifth place shows exactly why that distinction matters. And just before we jump in, I want to let you know minutes ago I released our latest weekly article covering 40 stocks near 52e lows with three that I believe are great for consideration. Now, as always, we do drop one every single week uncovering severely undervalued stocks as well as what's going in the market. You can click below, sign up, read these straight away. In fifth place, we've got Caterpillar. This one's trading $730. Now, yes, it is up 28% year to date, but in the last 5 days, down 9% in the last month down in the last 6 months. It is in a bit of a downward trend. We can also see in fact Wall Street and Seek Alpha, while they do get a buy rating, it is on the weaker side. We're talking around four out of five. So, Caterpillar, a company well below its 52- week high of $1,73. Yet, it is up substantially this year, as we pointed out, 28%. It makes it a useful test of whether a large pullback actually offers value. I mean, if we start here with the forward multiple, it comes around 25 times earnings against a 5-year average of 17. So, even after the decline, investors are paying a significant premium to their recent historical valuation. And if we look at the blue tunnel from Simply Safe Dividends pointing out intrinsic fair price, well, even with the drop that we've seen, in fact, it kind of peaked around July this year, it's still got a massive disconnect, indicating potential overvaluation. Last time this was reasonably valued. You'd have to go to the beginning of 2025, undervalued towards the end of 2023. Now, growth does help explain the premium of Caterpillar. We can see estimates showing earnings increasing to around $27 this year, almost $33 by 2027, and then $39 by 2028. Delivering that path, it would improve the valuation considerably over time. And revisions, they're also encouraging to 25 earnings upgrades against one cut. It suggests analysts have been gaining confidence. Revenue revisions, well, they also lean positively. That gives the ball case support beyond the price chart. And it's also a real business opportunity. Caterpillar. It benefits from electricity demand and data center investment with strong recent power generation growth. Construction resources remain important. So the wider business still carries cyclical exposure. Forward revenue estimates 11% growth. Longerterm EPS sitting around 18%. My interpretation is that recent selling partly reflects investors reassessing a premium for these types of opportunities. strong demand. It can coexist with a falling share price when the valuation already assumes substantial success. And notice how the quarterly comparisons involve. We can see larger near-term growth rates and they ease in fact further out. The durability of orders matters because buyers are paying for a business that needs to keep producing beyond the strongest comparisons. And with Wall Street, they do see this even with the four out of five rating as an opportunity. Average target price $951 implying 30% upside. Now my DCF model as we can see it goes from 9 and a half billion reported free cash flow to what analysts are forecasting in 2026 full year at 12.5 billion then followed by an 11% growth rate which is in line with their 10year keer comes to a valuation of $864. Now we can see the larger intrinsic price here of 97 is the average of these three methods. Discount and cash flow multiples and the dividend model. The DCF is actually the lowest one. But the distinction helps us understand where the overall valuation comes from as well as the limitations. And we can take a look at net debt ebitar looking attractive as it is below the 2 and a half that we want for the industry sitting at 71 expected to come down slightly to 61. Now for dividend investors, the yield is below 1% here. Dividend growth, it may help future returns, but current income provides a limited cushion if investors become willing to pay a lower earnings multiple. So Caterpillar takes fifth, a business with attractive opportunities where I want more valuation protection. I'll watch orders power demand and margins in earnings for fresh money. I currently prefer the companies that are coming next. In fourth place, we've got Visa trading around $400. Investors have continued paying for its payment network quality. Its recent strength also has a fresh positive development behind it with potential for future growth. I mean year to date they're up 15%. Over the last month they're up around eight. Over the last six around 28 and over the last 5 years they're up 75. Trading as we can see very close to all-time highs at $45 with a strong buy from Wall Street very weak buy from Seeking Alpha. and Visa received approval to begin preparations for domestic clearing in China. Further regulatory steps remain, but it's a meaningful growth opportunity, although I'd avoid assuming it immediately transforms the existing revenue trajectory. And remember, scale with Visa is very impressive. We've got units here, their thousands, putting the latest figure above half a million transactions per minute. That activity gives Visa an enormous network through which to earn revenue. Visa operates the payment network. Lenders generally take the direct credit risk on cards. Spending still affects transaction volumes, but Visa's economics, they differ substantially from the lender that we're going to discuss next in the countdown. In terms of projections, analysts forecasting 12% revenue growth. Longer-term EPS coming in at 15% with forecast earnings reach $13 this fiscal year, then $15 by 2027, then 17 by 2028. That's consistent growth at today's price. Investors only pay a substantial multiple for that expected consistency and revisions. They support the quality argument here. 31 earnings upgrades against five cuts with a similarly positive revenue balance. Analysts are moving expectations in the right direction. How much improvement does the price already reflect? Now this historical comparison it helps. Visa's forward multiple now sits around 28 versus a 5year of 26. Quality deserves consideration, but the entry valuation is still above the recent historical norm. And when we take a look at the blue tunnel, it's sitting right there towards the upper end. Still reasonable signal, but heading towards a potentially overvalued level. We can also see repurchases. They've supported the per share story. The share countdown is declined materially over the period. Business growth alongside fewer shares. It can allow each remaining share to participate in a larger portion of future earnings. And the model starts with 24 billion of free cash flow in line with analyst projections. We can see it then assumes the middle rate here of 10% and 8% discount rate and it comes to $420. Now that's only really around 5% upside. If we take a look only a 5% margin of safety too. But one thing I would say here is a small change in growth or return assumptions. It could absorb it. I want more room between the price paid and estimated value before making Visa a priority buy. Now these balance sheet ratios they are supportive. My hesitation centers on the entry valuation. Visa's business it can perform well while its shares deliver more modest returns if the earnings multiple investors pay does come down. Now the yield we can see sitting at 7%. Visa it can suit dividend growth investors but returns still depend primarily on sustained earnings growth and the price paid to participate in that growth. So Visa takes fourth. I'd keep it under review and seek a better entry for fresh money. Next comes a company offering much faster expected growth alongside a significantly more demanding risk assessment and that is SoFi trading around $145 down 44% year to date. It creates a potential opportunity. The first question is whether the business has weakened to the same extent as the shares. As we can see, trading pretty much at 52- week lows. A near strong buy from Seek Alpha, but we get a hold from Wall Street. And we can see their membership, it reached around 16 million in June that was up 35% over the year. More customers, they create opportunities to sell additional products. The economics of those relationships, they determine how valuable that growth has become. Deposits, well, they've also expanded with SoFi's figure round to 46 billion. They are funding that belongs to customers with repayment obligations. They support lending rather than representing spare cash available for shareholders. Now, their year-on-year revenue growth that sat at 41% with strong forward expectations coming in around 33. Expansion needs to translate into durable profit while lending growth requires capital. Those requirements are central to deciding what this growth is worth. We can see forecast earnings rise from 59 cents this year to 82 cents by 2027, then $13 by 2028. Next year's growth, well, as we can see, that's around 38%. Implying roughly 18 times estimated 2027 earnings. Now, earnings upgrades and cuts, they are fairly balanced. While all 17 revenue revisions shown are positive, it suggests the debate extends beyond customer demand to the profitability and the capital required to serve that demand. And we can see here the quarterly forecast. They also anticipate strong growth. Earnings on October the 27th will test that confidence. I'll examine the composition of the result because how profit is generated matters alongside the headline earnings number. Now, KBW recently warned that rising rates could pressure the fair value of SoFi's loans and consume capital. That makes the book value in fact and the quality of reported earnings, particularly relevant to the current valuation. Its estimated rate headwind exceeded a billion dollars before hedging. This is an analyst estimate. Its base case still expects guidance to be met. We need to assess what the company actually reports. Now the model here assumes negative -2 1.5 billion of free cash for this year followed by positive 1 billion next year. The large reversal is already included before the subsequent growth assumptions start to compound. Now that result gets to $2025 indicating 39% upside and a margin of safety of around 28%. I treat that as a scenario alongside earnings in capital. conventional free cash flow, it can be difficult to interpret for lenders, particularly when their loan books are expanding. And Wall Street, well, even with the hold that we saw, they see $20 over the next year. That indicates around $40, but the range is very wide, 12 at the bottom end, 30 at the upper end. And the low ratio here, it also needs banking context. Deposits, loan assets, and regulatory capital matter enormously. Conventional net debt ebitar cannot establish bank safety in the way that investors might use it for industrial companies. I place greater weight on earnings, credit performance, and capital coverage also thins sharply after 2028. Later forecast they deserve less confidence than nearer years with more analysts contributing to the estimates shown. At roughly 18 times next year's earnings, I see the appeal for investors comfortable with these risks. But paying above book value need support from attractive returns on the equity backing the business. So so far it earns third a credible high risk opportunity with earnings carrying substantial importance. I want growth producing attractive returns without weakening capital. Our next company offers a different route to growth through enterprise software. And in second place, we've got SAP trading around $224. The recovery from the summer lows has been substantial. We can see in fact it was trading $145, now sitting in the midpoint of the 52- week range with a near strong buy from Wall Street, weak buy from seek Alpha. We need to judge today's opportunity after the recovery. While the shares, we can see they remain quite significantly away from their 52- week high. Now, the cloud transition is central. SAP combines recurring relationships with important enterprise workflows. Revenue growth can drive better profitability and cash generation as that transition progresses provided the cost of delivering it remains controlled. I mean they're forecasting 12% growth revenue over the next 12 months. Longerterm EPS bit disappointing at 10.7 significantly below the sector marginally below their own 5-year average. And we can see from Morgan Stanley here their third quarter preview. Now it shows the hurdle consensus cloud backlog growth is around 25% at constant currencies with cloud revenue growth around 24%. Those are quarterly analyst expectations rather than reported results. And earnings they're forecasted to rise from $18.15 this year to $960 and then $1143 by 2028. That as we can see here is high teens growth over the next two years with a 2027 multiple coming out to around 23 at today's price. And revisions explain the caution. Revenue upgrades exceed cuts while earnings revisions lean the other way. Investors need to establish whether sales growth can produce the anticipated profits while AI related investments add to the costs. We've got the preview here putting adjusted operating margin around 29%. It gives us another hurdle to compare against results. Evidence supporting both demand and profitability. It would make the case more convincing after the recovery. And you got the forward P here sitting around 25 versus a 5year of 23 is reasonably close to normal. SAP has become more reasonably valued. Although investors still pay a premium to the average and we can see when we look at the blue tunnel pretty much right at the upper end indicating potentially overvalued slash maybe reasonably valued and it's good to see the balance sheet picture which is reassuring. The ratios indicate no positive net debt. It provides a different financial foundation from a business relying heavily on borrowing to fund their expansion. And the model starts with 11.3 billion from analyst projections in 2026 and then 8% subsequent growth. We got a 8% discount rate which does give the total $279. That's around 25% upside. We can see around a 20% margin of safety. Where Wall Street see $260. They believe there to be around 16 17% short-term upside. And we can note that high teens near-term earnings growth makes their cash flow scenario worth considering. Further our estimates as we can see they do in fact have fewer analysts behind them. I put greater weight on the better support years and the guidance that management actually provided and the lower growth case it gives $243. The strongest case 321 each retains the same discount rate requiring a higher return. Obviously it will reduce these valuations. to the apparent cushion we're seeing. It remains dependent on these assumptions. My earnings checklist is backlog, cloud revenue, operating margin, and cash conversion. We got a table here. It gives us expectations to test. Consistent delivery would strengthen the case for buying around current levels after the report. So SAP takes second for the established enterprise business. Cloud growth in cash generation at a valuation worth considering. I favor a selective approach before results. First place carries an even bigger earnings test and my first choice is Meta Trading around $79. The advertising business provides substantial earnings power alongside new AI opportunities. The biggest challenge is the cost of pursuing those opportunities. Now in just the last week it was down around 4 and a half% over the last month. Although it is positive over the last 6 month positive year to date though it's just not that impressive over the last year is pretty much flat and we can see it trading towards the upper end of the 52- week range strong buy from Wall Street weak buy from C alpha and if we start with the existing business advertising impressions they increase 14% in the second quarter that tangible activity gives the investment case a foundation in platforms that's already generating substantial revenue while newer products develop and at the same time. Average pricing per advertisement increased 12% too. More impressions and stronger pricing supported revenue growth. Those operating figures matter when assessing the benefits that Med has already extracts from its platform and their continuing commercial relevance. Revenue growth that Strongbook cash flow is more complicated. The investment program absorbs substantial resources. The question is how quickly improvements in the existing business translates into cash left for shareholders. Revenue projections 23% earnings per share long-term 20%. But we can actually see here free cash flow is down 34% year-over-year and research and development represents a large share of spending. Their latest quarter also included legal charges and severance. So different costs have different implications for ongoing margins and making the expense mix more important to earnings. And capital expenditure something else to watch as well. Their Q2 came in more than 31 billion against 17 billion a year earlier. It explains why even strong revenue growth can leave investors uneasy about how much free cash flow the business produced. And Meta's report is a wider test of AI confidence. We're going to listen to an interview explain why adoption and monetization matter alongside spending. Listen for the evidence that would help establish a stronger economic case for continued investment. >> Right. So JP, I think this week Meta is really going to be the key name to watch because I want to know two things for Meta. I want to know that they're going to continue to spend money and I also want to know what adoption is looking like for Muse because if Muse is seeing significant adoption figures and they lay out a path for monetization, I think that's going to help questions with respect to their ability to continue financing. And the more we see adoption of Muse, that's what we need to see broader AI adoption across the overall economy. It's still very low adoption overall. We forget how many people outside of our ecosystem are not yet using AI. So I think that's going to be a really important barometer. That's the earnings test. Adoption needs a path to revenue. While the benchmark showing model capability, but commercial success also depends on pricing and costs. A competitive model still needs an attractive business behind it. And we've got the analyst scenario showing range of outcomes. The base case has got muse revenue around 28 29 billion in 2030 alongside very different bear and bull cases. These are potential outcomes rather than company guidance. And today's Morgan Stanley target increase. It reflects confidence in advertising improvements and potential AI revenue. They've moved it from 775 to 820. It strengthens the bullish argument. Although I still want to assess the earnings and the cash flow assumptions behind the opportunity where we can see the average analyst target isn't to diss the similar 815 seeing around 15% short-term upside. Some bulls see it above $1,000. And consensus earnings that reaches $3463 next year, $40 in 2028, and around $710 next year's estimate multiple, well, it sits around the 20 mark. The valuation starting point is particularly interesting to me within today's groups of companies and we can see here from simply safe dividends the forward P pretty much sits around the 5-year average. It supports considering the shares alongside the future cash flow outlook. Historical averages though they can't fully account for changes in how much investment the business requires. Now the warning is visible here. Revenue revisions they're predominantly positive while earning cuts heavily outnumber upgrades. Strong sales growth is coexisting with rising costs reducing the profits that analysts expect shareholders to receive. And my model makes the recovery explicit. The first five cash flow estimates are 25075 and $95 billion. The recovery must be earned through growth and better cash conversion over time. The resulting value $832 where we can see a margin of safety sitting around 15%. It makes meta interesting although the cushion is modest given the uncertainty around this continuing investment program where after the recovery the model assumes 12% annual growth through 2035 then 3% as we can see here terminal growth discount rate at 8% a higher required return again would materially reduce the estimated value spending well that's central to my earnings checklist what does the investment buy when does capacity become useful and how do revenue and profit benefit compare pair with continuing cash requirements. Management needs a credible answer. I also want evidence from advertising. Better results for advertisers can support demand. The existing business gives us operating measures to follow while newer products work towards establishing a meaningful commercial contribution of their own. For Muse adoption and monetization evidence should narrow this range of outcomes. I would avoid adding the full scenario value on top of forecast that might already incorporate some of that AI growth. And these leverage ratios are relatively modest supporting financial flexibility. Still, new spending must earn attractive returns. The ability to fund expansion and the benefit shells receive from that expansion. They remain separate questions for investors. So, MEO takes first for his existing earnings base valuation and future opportunities. I'd approach it through selective buying, allowing for volatility and further evidence from earnings before building greater conviction in the cash flow recovery. So, as a quick recap, in fifth place, Caterpillar. The power opportunity is attractive, but the valuation retains a substantial historical premium. I want a larger cushion before prioritizing fresh money, particularly with the business still exposed to investment cycles. In fourth place, Visa quality and growth, they remain appealing with China offering potential. Estimated upside is small, so I prefer a better entry while following how the underlying business performs. So far, that comes in third. Strong expected earnings growth makes it interesting after the decline. Credit loan valuations and capital requirements they determine my conviction. Those issues make it the higher choice among the companies we've examined today. In second SAP cloud growth, existing cash generation and upside form a compelling combination. The next step is confirmation that demand translates into improving profits. Earnings provide an immediate test of that expectation and meta. That's first. I favor the advertising economics and valuation relative to expected earnings while recognizing the investment costs. Cash flow recovery is central to my estimate. So I keep the position and expectations measured. Let me know your views though. Which one would you put first? And which earnings result are you waiting to hear from? If you enjoy today's episode, smash that like button, hit the subscribe and bell so you're always notified of future releases. And don't forget to sign up to the weekly newsletter. Go ahead and read this straight away by click on the pin comment. More importantly though, have a great day. I'll see you all on the next one.