This Dip Won’t Last (Buying These 5 Stocks Now)

The stock market is not crashing and that is exactly why the opportunity underneath the surface is so easy to miss. Meta in fact that is more than 30% below its high. Amazon is down almost 10% and we have American Express that's down 13%. And just look across the market dozens of major businesses they've already suffered draw downs of 20 30 or even 40%. And more specifically, when we look at the NASDAQ 100, the damage is most obvious in technology. But this is not going to simply be another video telling you to blindly buy every single red box on a heat map. In fact, a falling share price only becomes an opportunity when the declines greater than the deterioration in the underlining business. So today I filtered through the damage and selected five companies where the earnings, competitive position and valuation still justify buying the dip. But before we dive straight into them, there are two competing explanations for what is exactly happening. The first is that rates and uncertainty will keep punishing valuations. The second is that earnings remain strong enough to overpower that pressure. We've got Jenny Harrington making the clearest version of the earnings argument. Listen carefully because this is the foundation of today's five stock thesis. >> Does next week hold the key on both regards earnings and Fed speak? >> I don't think next week even matters and I'll tell you why >> that is a Zoro suggestion. So please explain yourself. >> I think Wor is off the hook because earnings are doing all the work, right? We've had a year where the tenure has gone from 4.2 to 4 and 3/4 and the market's up. If you told me at the beginning of the year that interest rates are going to be up that much, you wouldn't think stocks are up that much. Why are stocks up? Because of the spectacular earnings growth. >> And that matters because prices and fundamentals are currently telling two different stories. Share prices are signaling fear while several of the companies we're about to examine. They're still delivering double-digit revenue or earnings growth. Now, the near-term question that's going to be whether next week becomes another reason to sell or actually the event that finally clears some of the fear. And Tom Lee believes it could be a clearing event, particularly for the part of the market that suffered from growing doubts about AI infrastructure. Let's take a listen. >> That feels to me like it makes next week even more consequential for stocks. >> Uh, I'd agree. I think it's what I'd consider a clearing event because let's take the AI story. There's been concerns about data centers and political opposition and it's caused this the trade to stall. I think it I think Jensen Hong is going to reinject a lot of confidence that look there's still this relentless demand story and it's going to be taking place regardless. Now that doesn't mean every AI stock is cheap. And after yesterday's Nvidia deep dive, I'm not simply repeating Nvidia today. The pullback has spread far beyond one company and some of the better risk reward opportunities they're now hiding elsewhere. Now the first stock is the most controversial of the five. Its core business is growing rapidly as valuations falling below its own history and is simultaneously facing a legal threat that could reach an extraordinary headline number. And Meta, well, it trades around $550. Year to date, the shares are down 17% over the last 12 months, it's lost one quarter of its market cap, trading very near to its 52- week lows, where whilst we see a weaker buy rating from Seek Alpha, Wall Street do believe Meta today is a strong buy. Now, Wall Street's average price target remains around $754, implying 37% upside. But the reason the apparent upsides exist is not difficult to find. essentially the reason why MED has been battered, investor attempting to price two enormous uncertainties at once, the possible financial and operational consequences of Meda's child safety litigation, and the returns on increasingly expensive AI buildout, and the legal risk is not a routine fine that can simply be ignored. This new federal case is being treated as a bellweather, meaning it outcome could influence thousands of related claims. If the trial doesn't go Meta's way, the financial implications could be [music] massive. The states have said they're seeking around $200 billion for consumer protection violations, [music] and the judge's ruling is expected to set the tone for other pending cases around the country. The crucial wording is seeking around 200 billion. That's an allegation and requested remedy, not an established liability, but the risk it extends beyond the cash amount. restrictions on infinite scroll, autoplay, age verification, or youth focused design. It could reduce engagement that would strike much closer to the economics of Meta's advertising engine. Yet, the latest financial results, they don't resemble a business audience decline. Their second quarter revenue reached 61 billion, up 28% year-over-year. The problem though is that costs grew much faster. Total cost and expenses increased 55%. Operating income declined 8% and the operating margin fell from 43% to 31%. And that brings us to the second fear. Meta's core advertising business can fund enormous investment. But investors still want a clearer explanation of how all the infrastructure creates new revenue >> that I think Meta needs to do more. And I think there's more revenue engines they can fire up and and the fact that you can't see those and everyone's asking, you know, what are those going to be >> is causing this concern. So they're spending more money on capex, but they're not giving an example of what are all these other initiatives they're going to drive. Is it selling cloud compute? Is it is there a bigger opportunity in and messaging? Like what what are those? >> Now the criticism is fair. Metas explain how AI improves recommendation quality and ad targeting, but it's been less precise about the next independent revenue engine. So, the market is therefore valuing the company as if much of the coming investment will earn a poor return. That's where the opportunity begins because today Meta trade around 17 times Ford earnings compared with a 5-year near 22 is not cheap relative to every tech company but it is inexpensive relative to their own history and their own profitability. And when we look at the blue tunnel from simply safe dividends while it highlights intrinsic fair price there's the disconnect on the bottom end between the lower end of the fair value and the price today. This typically could give a undervaluation signal but always have to highlight Meta for many many years going back to the last 20 has traded for a long time in a severely undervalued level. Actually quite rare when we look at the history to see Meta really trade at a premium and under the current consensus earnings the multiple falls to roughly 15.9* 27 earnings 13.4 on 28 and 11.6 on 2029. And we can also see the forward PG ratio is around 0.9. In other words, the multiples not demanding if Meta can deliver the expected earnings recovery. And my own base case DCF for Meta, it produces a value at the middle rate of $832 indicating potential upside here of around 52%. The lower growth result at 10% $770 using 41% upside. But I wouldn't even call the lower figure conservative because the model as we can see it assumes a free cash rebound sharply after the current investment cycle if the recovery is actually delayed the valuation falls is precisely why test assumptions rather than blindly quoting just the headline intrinsic figure and even a far simpler earnings approach offers support $31 of forward earnings at a 20 times multiple gives a value above $620 before assuming any major new AI high revenue streams. And for those that missed our deep dive, well, we also did two different scenarios. We actually had a bare case where we can see the intrinsic price is lower, $568. The difference is essentially the future free cash flows. We have used a lower figure just to highlight this bare case. Now, growth rates are exactly the same, but you can see in relation to the price, it only sits a little bit higher at 4%. Likewise, we did the exact same thing a bull case where the free cash flow accelerates at a faster rate than both the bare and the base case. We had to $1,179 indicating a very large margin of safety. But to conclude on Meta using the base case, if we were to go one step further and actually stress test the discount rate, again, we did this in that deep dive at 9%, we're still seeing value here, $668, a margin of safety of 18%. And if we go another step further, let's say 10% 553, there is a massive margin of safety, in fact near face value, but it just highlights the opportunity today. So going back to the base case at the 8% level with a reverse DCF, not in fact justifying a lot at 1.3% and a margin of safety of 34. My conclusion would be that the market is correctly applying a legal and investment discount, but it's applying too much of one. So meta my highest conviction large cap purchase in the group although I'd build a position in stages while the trial remains unresolved given there could be a lot of volatility. The second stock is less dramatic. It doesn't offer meta's apparent upside but it may provide the best combination of quality resilience and predictable shareholder returns. Now, American Express AXP, it trades around $336. It's down around 9% year to date and unlike a struggling regional bank. The economics are built around a premium closed loop payments network and an unusually affluent customer base. In terms of where it sits around the mid to low end of the 52- week range, 52- week low for American Express, it's at $291. We get a double buy from C Alpha Wall Street, although both on the weaker end. And in their second quarter, their revenue grew 10%, earnings per share reached $453, and card member spending increased 9%, the strongest spending growth in three years. That's why the initial market reaction appeared strange. The shares fell even though the company raised its revenue outlook and reported accelerating card member activity. >> AXP, you know it, down 3.3% and off about 8% year to date. And I have to say I'm a little confused about it because credit card um credit card issuers uh reported second quarter revenue net card fees that came in very strong but I guess just below expectations because the stock is down. It boosted its revenue forecast for the full year. The increase in sales primarily driven by higher card member spending. So people continuing to spend big on these cards that increased 9%. That's the highest growth rate in three years. So for all the talk about, you know, consumers maybe pulling back, they're charging it at least to their MX. >> The significance is not simply that people are still spending. American Express is disproportionately exposed to consumers who are currently absorbing economic pressure better than the average household. We can see that US consumerbuilt business grew 11%, Gen Z spending, well that increased 40%, millennials 14% and Gen X grew 10% with baby boomers sitting at five. Now the obvious bare case is credit quality delinquencies are rising across parts of consumer finance and a premium customer doesn't make American Express immune to a recession. We can see in fact here American Express has its own delinquency and write-offs while they remain below 2019 levels with delinquency rates between around 1.2 and 1.3% for more than 3 years. And the deeper advantage is the membership model. Cards in force increased from around 114 million in 2019 to around 155 million and at the same time average fee per card rose from $61 to 131. It represents a compounded annual growth rate around 12 and a half% and well this combination it produces exceptional economics a return on common equity close to 34%. We can see more than $18 billion of operating cash flow and an overall profitability grade of A+ and then we can see their revenue stats. Forward revenue in fact projected to be 9.6% while forward earnings growth coming in at 12.8. Yes, it's not hyper growth, but it is durable double-digit compounding where the shares for American Express trade around 18 times Ford earnings close to the company's 5 average. So, American Express is not a deep value stock simply because it's declined. And when we do look at the blue tunnel, it does sit firmly in the middle, which could signal a potential reasonable signal. Look at the last 5 10 years. There have been many patches where it's traded premium, but very very rare to see a quality company like American Express trade in an undervalued level. In fact, last time we saw that, not long at all in 2025. Now, my blended valuation for AXP comes to $388 per share. It's around 15% above the market price. Wall Street, their forecast, sits a little bit lower, $376. But if you were to look at just a standalone cash flow model, well, it produces a much higher number. But also remember, traditional free cash flow valuation, it's less reliable for a financial company because of lending, funding, and working capital. They're part of the product itself. So, I'm not going to sell the story using the most optimistic DCF. The honest case is simpler. American Express offers moderate upside, excellent profitability, powerful buybacks, and a premium customer base at what I'd say is a broadly reasonable price. So, AXP for me, it's a buy, but it's the quality anchor of the five. Not the stock with the largest margin of safety. And the third company here has a much larger potential catalyst, but it's also spending capital on a scale that makes the free cash flow numbers look very alarming. And before we do get into Amazon, just to let you know, I release one weekly article where we uncover severely undervalued stocks, what's going in the market, as well as other useful information. You can click below, sign up, read all of these straight away. Now, Amazon trades around $258. The shares, they are up around 12% year to date, but they've also pulled back from all-time highs at $287, and it is more of a pullback rather than a crash. The reason it still belongs in the episode today is the extraordinary acceleration that we're seeing inside AWS. And AWS, it was recently viewed as the cloud business losing momentum to both Microsoft and Google. Their latest quarter that changed the narrative dramatically. >> This business is now on $170 billion a year run rate to be growing 37% from 31 from 28% last quarter is an incredible acceleration. And that 25 billion of of AI revenue, that's real. When we talk about are these companies getting a a good return, yeah, $25 billion of uh of of annualized revenue at probably 35% margin. That's a very good return on that capex. >> AWS generated around 42 billion of quarterly revenue and accelerated to around 37% growth. Achieving that rate from a revenue base this large is far more important than the percentage alone suggests and AWS customer commitments has climbed to around 496 billion. The backlog doesn't convert into revenue immediately but it provides unusually strong visibility into their future demands and we have some third party forecasts that expect AW capacity and revenue to grow dramatically through 2035. Now obviously these are analyst estimates not company guidance but they illustrate the scale of the opportunity that investors are attempting to value and also bear in mind Amazon possesses an increasingly valuable stake in anthropic. Their reported fair value risen sharply, but obviously this should be treated as an asset value kicker, not recurring operating profit and not cash which is available for immediate distribution. And the market is not questioning demand as much as it's questioning how much Amazon must spend before shareholders see the cash. This is the most important number in the entire Amazon thesis. >> Amazon free cash flow falling to an outflow of $7.6 billion trailing 12 months. What do you make of that? that had they reported a week ago and Google reported today, they'd be getting punished for that. But the the market had a week to digest the fact that Amazon will have negative free cash flow and so that was already in the stock. People understood that that that's where they were headed and so there's less of a concern about that. >> That is the tradeoff. AWS is proving the revenue opportunity is real, but the infrastructure required to serve the demands push trailing free cash flow into negative territory and Amazon's apparent forward P near 21. It also needs context. Current year earnings includes unusually large accounting effects associated with the anthropic investment. And using the consensus 2027 earnings, it gives a multiple closer to 25 times. is still reasonable for the quality of AWS, but it's less obviously cheap than the headline 26 multiple suggests. And if we look on a normalized basis, Amazon trades around 28 times earnings, close to the bottom of the range when we look to 2017 and far below the historical median that sits around 68. Now, my DCF, it produces a value of around $348 with lower growth using 8% coming to $296 and a higher growth outcome above $400. But these scenarios they do share an aggressive assumption that free cash flow recovers to 175 billion by 2030. Sensitivity table basically changes the growth after the recovery. So the so-called low case I wouldn't call it a genuine recessionary case. We haven't done a deep dive like we've done say for meta or Nvidia where we've tested bull baron base but if you do want to see that let me know in the comments. So the valuation itself is therefore best viewed as a range not a promise. Wall Street's average target $327 while my model suggests $296. Well, that's achievable with more restrained long-term growth provided the major cash flow recovery occurs. So, using the 12% growth rate and the 8% discount rate, we do get a margin of safety of 26%. If we do something similar to what we looked at for Meta, say we increase it to 9%, we still do notice a margin of safety. There is still some room, obviously a lot smaller at 7%. And if you're someone who wants to use a discount rate of say 10% well you can see we'll actually get no margin of safety. In fact a premium sitting around 14%. So Amazon it's a buying stages. I would accept near-term negative free cash flow because AWS growth and commitments. They indicate that the spending is attached to genuine demand. I wouldn't accept unlimited spending without eventual cash conversion. And then we move on to stock number four. the highest quality economics of the entire group and perhaps the most direct threat to its historic competitive mode. And that's fair corporation trading just below $1,200. The shares are down more than 30% year to date. And in fact, it's trading around 41% below its 52- week high of around $2,000. And the bay case, it can be summarized in one headline. The FICO monopoly is living on borrow time. For decades, FICO benefited from being embedded into mortgage underwriting and lending workflows. But now, the monopoly is no longer theoretical. Approved mortgage lenders can now choose between classic FICO and Vantage score 4 for loans, which are sold to Fanny May and Freddy M. And FICO 10T is also approved and planned for future use. Both new models can incorporate additional information such as rent and utility payments when the data is available. The threat, though, it's straightforward. More competition could weaken FICO's pricing power, reduce revenue per score, and eventually compress the extraordinary margin that investors have historically been willing to capitalize at premium multiples. The fascinating part, though, is that the financial results currently show the opposite. Third quarter revenue increased 26% to 674 million, while net income increased 30% to 237 million. In fact, when we look a little bit closer, school revenue increased 41% to 459 million, driven by businessto business mortgage revenue, software revenue, well, that only grew around 2%, but FICO platforms expanding much faster than the older non-platform products. You can also see that forward revenues expected to climb 19%, forward ebitar 27% and forward diluted EPS sitting above 30%. And honestly, these economics are exceptional. Gross margin sitting above 85%, EBIT margin above 52, net income sitting at 34% and free cash flow margin well that's sitting around 33%. And management they argue that many reported Vantage score volumes are supplied free alongside a paid FICO score and therefore they don't demonstrate genuine paid adoption. Now that is a useful defense but it's management's claim not independent proof that the competitive threat is irrelevant. Regulations change, lender choice is real, and the market now has a reason to question the future pricing. And FICO is historically used aggressive repurchase to reduce its share count. And the shot here shows how dramatically repurchase activities accelerated. Buying back stock at a lower valuation can create significant per share value, but only if the underlining moat survives. You can also see that trading free cash flows climbed towards 1 billion and the price to free cash flow ratio well that's collapsed to roughly 26 times. Now the shares they trade around 27 times forward non-GAAP earnings. It is still above the sector median by around 17% but we can see is actually below their own 5year average by around 38%. And on current forecast the multiple falls around 22 times 27 earnings down to 18 on 28 and then 15 times on 2029. and my DCF produce a midpoint of around $1,458 almost identical to what we can see from Wall Street 1476 26% projected upside. However, when we do look at the low growth scenario, it gives a value of $1,045 below the current share price. So FICO only looks clearly undervalued if it sustains approximately low double-digit free cash flow growth where the 12% we've used is actually lower than the most recent year lower than the five and 10 year KGA sitting at 15 and 16% respectively where the market today is pricing in around 9.4% growth. So at that base case we get a 20% margin of safety pretty much in line with Wall Street's forecast. When we climb that to 9% on the discount rate we actually see it pretty much sitting around fair value. Again, important factors to consider. So, my verdict would be a buy, but the smallest initial position among these five. The valuations finally become attractive. The financial performance remains outstanding, and the market may be pricing in competitive damage before it appears in the numbers. But, FICO, it's no longer the untouchable monopoly investors believe they owned at $2,000. If Vantage Raw gains paid adoption or pricing power weakens, the thesis must change. We then move on to the final stock which has the strongest growth profile of the five, the lowest share price and arguably the largest gap between growth in its earnings and the growth in its market value. Now, Enu Holdings trades around $14 to $15. The shares are down 13% year to date. And we can see in comparison to their 52- week highs, they're down more than 20%. In fact, when we take a look at the ratings, strong buy from Seek Alpha, near strong buy from Wall Street. And since the third quarter of 2023, NU's basic earnings per share have increased more than 8-fold, while its market cap, that's only roughly doubled. And NU, well, it serves in fact around 139 million customers across Brazil, Mexico, and Colombia, up from just 24 million in early 2020. And Brazil remains the largest market with around 118 million customers, while Mexico's reached around 16 million, Colombia roughly five. And honestly, the customer count alone is not the most important part. Monthly average revenue per active customer is risen from $330 in 2020 to around $17 today. Meanwhile, in fact, average monthly cost to serve that's remained near $1. And you is earning substantially more from each customer without allowing service cost to rise alongside it. And that's ultimately their earnings formula. More customers, rising revenue per customer, and an increasingly efficient platform. and well substantially greater profit. And we can see in their most recent quarter revenue reached 5.5 billion up 50% year-over-year. We can see net income 1.1 billion. In fact, it exceeded 1 billion for the first time increasing 49% year-over-year while return on equity reached around 33%. And when we take a look at their growth numbers were absolutely phenomenal. Forward revenue expected above 33%. Forward earnings growth that's expected near 40% and long-term earnings around 35. And against that growth will NU trades around 17 times expected 2026 earnings and approximately 13 times based on 2027. Now overall the headline P is higher than the financial sector median but the forward P that sits at.35. The premium is small relative to the difference in the expected growth and the low overall profitability grade here is misleading because generic cash flow comparisons work poorly for banks. the relevant figures. In fact, that's around the 32% that we can see here, return on equity, the improving efficiency, the net interest margin that we can note, and the overall credit quality. And with NU, in fact, credit is the real risk. NU is intentionally expanding into higher yield unsecured lending that improves revenue and margin, but it also increases potential losses when economic conditions weaken. Now early stage delinquencies improved during the quarter while loans more than 90 days past due rose. Some of the movement seasonal but investors should not dismiss it as noise. And one thing to highlight the business is still young is exposed to currencies and regulation across Latin America and increasing dependent on management maintaining disciplined underwriting while the business grows. and my blended valuation using earnings based methods. That's around $24.70 implying a 41% margin of safety against the estimate. Wall Street much more conservative around $19 where they see around 29% upside in the next 12 months. Now for a financial company, I place more weight on earnings, book value, return on equity and credit trends than on a traditional industrial company DCF. So in conclusion, NU is a buy for me, but it is the highest growth and highest volatility company in the group. I'd keep the initial position smaller than Metal Amazon and add only while the credit metrics remain controlled. And the important lesson from this heat map is not that everything in red is cheap is that the broad drawdowns give us the opportunity to be selective today. So Meta is my number one large cap risk-to-reward opportunity provided you accept the legal and capital expenditure uncertainty. Amazon, it ranks second because AWS demand is accelerating. Although the cash flow recovery must eventually justify the spending, NU, well, it offers the strongest growth and potentially the largest upside, but it also carries considerably more credit, currency, and emerging market risk. American Express is the quality anchor, less upside, but exceptional economics and the most resilient customer base. and FICO. It's the smallest initial buy because the valuation's finally reasonable, but the regulatory attack on its moat, it's genuine and must be monitored. So, it leaves the final five as Meta, American Express, Amazon, Fair Isaac, and NU holdings. I wouldn't buy them in equal size, and I wouldn't buy every single share on one day, but at today's price, each one offers a better balance on earnings power and valuation than the market's current fear suggests. And if the next major market event restores confidence, these discounts may not last. If prices fall further while the fundamentals remain intact, I would view that as an opportunity to continue building the positions, not evidence that the original analysis was automatically wrong. But let me know in the comments which of these five you'd buy today, which one you believe I got completely wrong. And don't forget to sign up to the weekly newsletter. We will be dropping a fresh copy shortly. More importantly, have a great day. I'll see you all on the next one.