7 Stocks Down Up to 46% — My Top 2 Buys

Some of the biggest stocks are rallying. Other businesses are getting sold almost every week. Look at this market. Green across parts of technology. Red across financials, consumer companies, and entertainment. We've got companies like Broadcom. They're down around 30% below its high. Alphabet that's down around 17%. Now, these are draw downs. They're not one day losses. And the lower price alone, it doesn't tell us which one deserves our money today. And we can also look at companies like Netflix. This one's lost around 28% this year. The valuation, well, it is looking much more interesting. We can see some massive draw down from its highs. But there's also a cash flow number inside the buying case for the company that we need to adjust before we trust apparent upside. Meanwhile, we've got PepsiCo that offers a dividend yield which is approaching 5%. Now, this could become an income opportunity, but it could also reflect problems that a familiar brand and a longd history just cannot solve overnight. So, in today's episode, I'm ranking seven companies from weakest to strongest buying opportunity. We're going to examine the business, why investors are nervous, and what the valuation assumes, the biggest projected upside won't automatically win. And I think it's important to understand what we saw in yesterday's reversal. Stocks recovered as bond yields retreated. The S&P finished slightly higher. Yet, the rebound hasn't erased the pressure, which is building underneath the headline index. Because look at this. Five stocks now account for around 30% of the index's market value. The concentration means a handful of winners can make the market look healthier than the experience of many individual investors. And this monthly heat map of the S&P 500 makes it visible. Money, it hasn't abandoned every stock. It's choosing favorites. It's why an AI rally and a sell-off in consumer financial businesses. They can happen at the exact same time. And we can also see the equal weight index is heading towards another losing week. Now, the week hasn't finished, but the distinction matters here. The average company is faced a tougher environment than the largest leaders. Now, before deciding whether the whole market is cheap, we're going to listen to this brief observation about where the leadership is narrowed. It helps explain why resilient index can coexist with so many disappointing charts. >> But today and over the last month or so, it's really been very narrow breath to your point driven by AI and I think that's going to continue. I don't think there'll be any pause. I think the uh the AI innovation it's uh the industrial revolution uh which is either fifth or sixth depending upon if you're counting another one back there um is going on and they're not going to be paused by rates. They're not going to be po paused by the price of oil. >> That describes the split we're seeing. But following the strongest group and finding the best long-term entry, they're different decisions. A stock can have strong momentum while another offers more attractive future returns. And the other pressure we have is borrowing costs. Treasury yields have climbed sharply that raises the return investors can seek outside equities and make distant corporate cash flows less valuable when we discount them today. Now, Thursday's 10-year yield, it pushed above 5.3% before reversing slightly. I mean, these are the highest levels we've seen. We're talking since 2002. Now, yes, the slight retreat help stocks recover. It was a welcome change within a volatile session, but borrowing costs, they remain high even after the slight reversal. And the latest PC reports show core inflation at 3%. That is better than investors feared, but still above the target. and energy remains a complication. We've got Robert Kaplan here explaining why oil and diesel matter at this point. >> Need you need oil and diesel to settle back down would help. Uh and uh I I think the bond market is is building in risk premia um more than usual and it's because of these uh uh issues we just talked about. >> Well, I'll opine on the energy side. Oil may calm down. I'm not sure diesel will because of what we just talked about. That leaves us with competing forces. Cooling core inflation can ease the pressure for further tightening. Higher energy costs can work against that improvement. One reassuring release doesn't settle the path for interest rates. And look, for consumer businesses like PepsiCo, the latest spending figures we heard also deserve attention. Spending that rose faster than income, while the savings rate fell to 4.1%. Demand remains resilient, but household flexibility is becoming more limited. And even though these are forward cash flow estimates, they illustrate how infrastructure spending can pressure the buyers while benefiting suppliers. Alphabet, Brocom, and Micron, those companies shouldn't be treated as identical bets simply because they all have AI exposure. And we can listen to Michael Gino on that trade-off. His point isn't that equities have become uninvestable. is that competing bond returns and elevated valuations. They demand more care over the individual stocks we choose. >> You look at the big macro story, uh the S&P 500's trading at a rich multiple. The earnings yield is around 4 and a.5%. Um and that's equivalent, you know, you can get risker risk-free bonds, shorter duration bonds now in that same zone. So for an income equity investor, a lot less risk in the bond market. Um, and for a go go growth investor, I don't know if it's the interest rates are going to matter as much. However, the higher you get valuation wise, the broader chance of a correction or a consolidation, and you got to be much more selective in your individual names. >> Equity earnings yields and bond yields aren't interchangeable returns. Stocks can grow, profits can also fall. The comparison though here reminds us that an attractive share price needs an earnings case rather than just a dramatic decline. And that's the test for today seven. Has the price fallen faster than the business value? Is the cash flow repeatable? And does the valuation leave room for disappointing growth or a higher required return? Now, let's start with the company where the apparent bargain is least convincing. And at number seven, it is Alphabet. Now, it's trading around $338. I like the business, but among these seven, its current price gives me the least convincing margin for error. Year to date up 8%. When we look over the last 12 months up nice 38% trading around the midpoint of the 52-E range we get a buy rating from Seek Alpha Wall Street with a strong buy. And when we look at the forward PE when it's sitting around 25 times it's above the 5year average of 22. Now it doesn't automatically make Alphabet expensive but it challenges the idea that the pullbacks already created an obvious bargain. I mean, if we were to look from Simply Safe Dividends at the blue tunnel, which highlights intrinsic fair price, we can see even with a slight pullback, it's still sitting above the upper end of the fair value. Last time this one was in fact trading in a severely undervalued signal was sitting around mid 2025. Now, it's good to see that growth expectations still remain substantial. Search, advertising, and cloud provide different revenue engines. Yet, strong sales and strong cash generation for shelters. They can move in different directions when infrastructure spending accelerates. Now this is the price to operating cash flow not free cash flow. Capital expenditure comes afterwards. The distinction is central when the company is spending heavily to build out its AI capacity. Now for the company there's some recent positive development and that's Gemini 4. The announcement helps address concerns over early delays and competition, but initial access is restricted and a successful product launch still needs to translate into financial returns. And the company reported benchmark tells us about the technical performance. They don't tell us the eventual profit per customer. So, I would treat them as evidence of competitiveness alongside the financial cost of delivering that capability. And Alphabet's latest quarter produced negative free cash flow despite strong cloud growth. Annual capital spending guidance was raised again is the central tension for similar companies too. Growth creates demand for capacity and capacity requires enormous investment. Now my model already assumes a major recovery. Free cash flow rises from 30 billion in 2026 to 180 billion by 2030 before 12% annual growth thereafter. Even with that recovery, the value we get today is around $343 against the price of 338, we're talking only around 1% upside. So, the model doesn't support describing Alphabet as a deeply discounted stock today. In fact, the reverse DCF saying that the price today already has 11 12% free cash flow growth baked in from 2030. Now, their 10year KGA that sits at 12%. So based at this midpoint, what we're seeing is a margin of safety very small of 2%. Now Wall Street, their average target price is materially higher than my model. The disagreement is useful. It shows the importance of growth in valuation assumptions rather than giving us a second independent guarantee of upside where they project 27% average price target $429. So my verdict for Alphabet is to wait for a better entry or stronger cash flow evidence. Alphabet can remain an excellent company while ranking last in this particular comparison of today's buying opportunities. Now the next company has the opposite problem. The valuation already reflects much less enthusiasm. The question is whether that discount adequately compensates us for weaker growth and pressure on the consumer. And look at number six, it is PepsiCo trading around $125. For an income investor, this may deserve a higher personal ranking. For overall long-term return potential, I want more confidence in the recovery year to date. Now, they're down 12 13% over the last year, down a similar amount, trading pretty much at new 52- week lows where we get just one buy rating week as well from Seeking Alpha. Now, the forward multiple is around 14 times compared with a 5-year average above 20. That's a substantial discount. But look, the market is also priced in a business growing more slowly than investors once expected. Where if we look at the blue tunnel from simply safe dividends, we can see disconnect between the price today bottom end of the fair value. Although the underlying fundamentals have been deteriorating. If we go, we can actually see they started from the beginning of 2025. So you have to bet that there is a turnaround play coming very soon. Now, PepsiCo is adapting its products and pack sizes that addresses changing tastes and household budgets. Now, this July headline is background to the recovery strategy rather than proof that the strategies already succeeded. And look, their latest quarter showed weaker North American demand and falling beverage volume. Management also expects higher input cost inflation means some of the share price weakness has a real operating explanation. Now there is an important counterwe international performance for the company's been stronger. It isn't a company with every division deteriorating but investors still need evidence that the domestic business can improve without sacrificing too much profitability. Now the yield sits around 4.7% its meaningful income while waiting but it still depends on the company's financial capacity. So I want cash generation and dividend coverage to remain central to the assessment. Now, if we look solely at the DCF for PepsiCo, we have future free cash flow 2026 based on analyst estimates. Then we've actually lowered the growth rate. It's sitting at 5% moving forwards. Now, this value comes to $146, which in fact implies solely on this model 16% upside. We're on a reverse DCF basis, we're talking 3.2%. Bear in mind that's pretty much in line with what we've seen from the 5year KGA. However, if we use the higher blended valuation incorporating the other methods, we get $163 23% margin of safety. Now, I give the cash flow result more weight when judging the available cushion. And analysts, they see upside too, but the immediate catalyst is October 8 earnings report that will help test whether the domestic recovery is progressing rather than simply repeating the expectation that it should eventually happen. So PepsiCo is a reasonable income focused buying candid at this valuation. Familiar brands don't guarantee a quick turnaround. It offers an attractive distribution but less growth potential than the companies ranked above it. So this earns sixth place. A lower price has improved the opportunity but the business still has work to do. The next company has extraordinary growth already happening and a different danger inside the valuation. And number five is Micron. Now this needs honest framing. The stock was up around 3% on Thursday and is up around 285% this year. It isn't another beaten down consumer company. We can also see it trading towards the upper end of the 52- week range with a double strong buy from Wall Street and Quant, weaker buy rating from Seek Alpha and their latest results explain that strength. Revenue and earnings exceed expectations as memory demand and pricing remain powerful. The opportunity comes from future earnings potential even after the enormous rally we've already seen and guidance. While it points to another record revenue quarter, the modest gross margin decline attracted attention, but management linked part of it to employee incentive compensation following through manufacturing inventory. That isn't the same as collapsing demand. Where data center demand is a major part of the story alongside other memory markets, more compute can require more memory. But the relationship between demand growth and future supply that remains crucial to sustaining today's pricing. Now the forward multiple it does look exceptionally low around seven times with a cyclical business. The number needs scrutiny. The cheapest looking multiple can coincide with unusually high earnings rather than unusually low expectations where when we look at the blue tunnel we can see severe undervaluation signal. But this has only happened because the earnings have continued to get stronger and stronger. We can see pretty much every single quarter and history shows the cyclicality. Micron moved from losses to extraordinary profits. I don't assume those profits immediately reverse, but I also won't value the company as though the semiconductor cycles have just disappeared. Now, Matt Bryson explains the b case. New supply may arrive, yet demand could grow quickly enough to absorb it. Listen for the condition underlying that argument. The continued strength of AI investment. There are certainly concerns around supply coming on, right? Supply is always what ends these cycles. Um it's late 27 28 that we get that we get that supply going on or coming on. Um the the thing to remember though is that we're getting huge estimates for accelerator builds and CPU builds. So when you think about Brocom for instance talking about demand doubling and then doubling again and the amount of memory for each of these compute chips or accelerators is the same. and that big growth is nowhere close to that. So, as long as you have this strength in AI, um even if you get more supply coming on, it's really unclear to me that supply catches demand. That's a credible argument, but still a forecast. Long-term supply agreements improve visibility. They don't lock in every dollar of future revenue, and the uncontracted business remains exposed to changing market conditions. My base model values Micron around $1,270, around 16% upside. We're talking a 14% margin of safety. That's positive, but it isn't an enormous cushion against a disappointing memory cycle. The model deliberately allows cash flow to fluctuate before later growth. Also based on analyst predictions, if we were to increase the discount rate to 9% while the value actually falls below the market price. So bear in mind, cheapl looking earnings multiple don't remove that sensitivity. My verdict, a higher risk growth buying candidate ranked fifth. The challenge is buying after that rally without assuming today's extraordinary conditions will continue indefinitely. Now before we continue, just to let you know that I released one weekly article, uncovering severely undervalued stocks, as well as what's going in the market. You can click below on the pin comment, sign up, read all of these straight away. At number four, we've got Disney around $100. The stock, it did fall sharply on Thursday. Here, the opportunity rests on a lower valuation and improving operations rather than an exceptional semiconductor profit cycle. Now, down 11% year-to- date over the last year, down fairly similar, trading towards 52-E lows. We get a strong buy just from Wall Street C alpha with a weaker buy. And the forward multiple, well, it's trading below 14, and that's lower than the 5-year average of 20. Now, the average does include some unusual periods. So, I'm not going to assume an automatic rebound to it, but the underlying recovery that matters more. Well, when we look on the blue tunnel, we get a severe undervaluation signal, although has been below the fair value over the last year. Zoom out to the last 5 years. Nice to see from 2023. Fundamentals have been improving. Share price though doesn't look like one of those companies that investors have been happy to pay a premium for. And experiences is a major profit engine. The latest quarter here showed stronger revenue and segment earnings there. That challenges the idea that the entire business is broken simply because the share price has struggled. There are still weaknesses. Sports profitability face pressure. Some films underperformed expectations and the television business continues to change. The reported restructuring and layoffs. They highlight the ongoing transition rather than proving the recovery is complete. And worth highlighting that streaming is becoming a stronger contributor while parks and cruises connect directly with Disney's franchises. The combination gives the company several ways to monetize successful content beyond a single film's opening weekend. But worth flagging competition for viewing time is intense. This is a US television time snapshot, not global streaming market share. It reminds us that Disney competes with YouTube, Netflix, and many others for audience attention. That's why I want a lower entry valuation here than for a simpler, more predictable company. Disney's discount has to compensate for content execution, the television transition, and sensitivity to discretionary spending. The cash flow model gives us $140 against the closing price from yesterday. Well, we're talking 39% upside, 28% margin of safety. Now, the valuation assumes sustained cash generation and growth. It doesn't assume the old television business suddenly returns to its peak. The more useful question is whether expanding businesses can outweigh the pressure elsewhere. So things I would look for include streaming profitability, spending returns, cash generation alongside park demand. A good revenue quarter can still disappoint if the investment needed to produce it consumes too much of the cash. My verdict, an appealing value buying candidate rank fourth. The potential upside is larger than number ones, but the path is less predictable. The difference is why the biggest valuation gap doesn't finish first. Now we reach the top three. This company has powerful growth in cash generation. Yet a new financing headline creates a question the headline earnings numbers alone cannot answer. Broadcom, that's what it is. $343. Now we can see here it's a meaningful pullback for a company where the operating results remain exceptionally strong. Down 1% year to date, up only 3% over the last year, trading towards 52- week lows. double strong buy from Wall Street and Quant respectable buy from Seek Alpha and revenue increased 86% in their latest reported quarter. Free cash flow reached 13.7 billion. This isn't only a promise that AI spending will eventually produce an earning stream. Substantial cash is arriving already. And Brocom also combines semiconductor exposure with infrastructure software. The chart we can see shows trading revenue rather than a single quarter. The software business gives it another earning source alongside the expansion in custom chips and networking. And the growth forecast, they do remain ambitious. Custom accelerators and networking can benefit as customers expand compute capacity. But rapid growth also raises expectations, leaving less room for weaker demand or less profitable business arrangements. Now, the forward PE currently sits just below 20, which is below the 5year average of 24. So potential undervaluation signal. Now this is also confirmed when we look at the blue tunnel. It's sitting just below the bottom end. If you want to see the last time we saw this case, well if you include 2023 but before that maybe just about at the COVID drop. And the new development is financing of up to $42 billion philanthropic that as potential financial exposure alongside the customer relationship, strong orders and a customer's funding capacity. They deserve separate scrutiny. And this morning's report describes a $60 billion financing package being assembled through banks. We shouldn't add the two headlines together or assume that the whole package becomes Brocom's own balance sheet debt. My question is how much exposure Broadcom ultimately retains and on what terms financing can support growth successfully. It can also make the investment cakes more dependent on a major customer's commercial success. Now our model starts with $48 billion. Again, from analyst expectations, it is quite a substantial increase from what we can see from the previous year. Only after that do we then get the middle rate moving forwards at 15%. With the base value coming to $456 implying 33% upside, it's an attractive gap provided the cash flow assumptions hold and the financing arrangements don't materially weaken the economics for shareholders. And at 9% discount rate, if we were to change that, well, the value falls to $368 at 10%. below the current price. Higher yields make the sensitivity particularly relevant today. My verdict for Brockcom with a 25% margin of safety is the strongest AI buying cander in the group. Ranked third overall. The pullback deserves attention. I keep it behind the final two because customer financing adds uncertainty to an otherwise impressive business. And number two, we've got Netflix trading around $67. It's down 28% year to date. Over the last year, down 42%. The decline is substantial, but to judge the opportunity, we need to understand why investors have lost confidence. I mean, it's pretty much trading at 52- week lows. We get a double buy from seeing Alpha on Wall Street. And the forward multiple, well, it's compressed around 19 times. That's much less demanding than their 5year average of 35. In fact, we're talking a 44% discount. Yet, a lower multiple can reflect lower future growth as well as improved value. Now Netflix itself is still growing with profitable operations and doubledigit revenue growth but the latest reported growth rate slowed and the next quarter forecast slows further. The market is questioning how durable is premium growth can be now recent analyst downgrades focus on engagement and the content strategy. Other analysts see international growth being overlooked. The dispute is about future monetization and competitive strength rather than whether Netflix suddenly stops making money. and Ted Sarendas addresses the concern directly. We're going to listen to his admission about growth, then his explanation of why live programming can create value without generating a proportionate share of viewing hours. >> In general, yes, overall, we're not growing as fast as I want us to. And we're working on on making that move faster. We are though also doing things that create a lot of headwind to that number. Meaning when we do live programming on Netflix, which is a relatively new thing, um we spend about 5% of our content budget on live events. They generate about 1% of our watching. >> Right >> now, they all but they do a very different job than other >> they generate a lot of signups. They're really effective for >> sign up, retention, advertising, all those things that they do, but it creates engagement headwind in how you invest against it. >> That's management's explanation and it needs testing. Live content may improve signups retention advertising. The financial question is whether those benefits outweigh its cost. While the core entertainment offering remains compelling. Now the company's profit history supports the positive case. Scale is translated into greater operating income. Advertising offers another route to monetizing the audience. Although its growth won't automatically solve every engagement concern. Now the adjustment I mentioned at the start. We can see here the original model gives us $9.1 billion as the starting value. Then we can see here for 2026 to 12 billion that includes a one-off benefit. So that headline result needs qualification because Netflix they did raise their annual cash forecast from 11 to 12.5 billion primarily because of the after tax warner termination payment. Growing that boosted starting figure indefinitely would treat a temporary benefit as recurring. Using the previous 11 billion forecast as an illustrative starting point with the other model assumptions unchanged that lowers the value of Netflix around $84 is not a new company forecast, just a cleaner comparison for this exercise. Now, it still gives around 24% model upside. Netflix therefore remains attractive without relying on the full $96 result, but slower engagement and revenue growth. They explain why the stock deserves closer monitoring. My verdict, an attractive long-term buying candidate ranks second. The valuation reset creates opportunity. But the next business, number one, well, it's easy to assess and less dependent on engagement recovery and content execution. And at number one, it is Visa. Around $359, it hasn't experienced the biggest crash. And my model doesn't give it the biggest upside. It wins on the balance between price growth and business confidence. They're also up 57% year to date, up 58 over the last year, trading mid to upper end of the 52- week range, weak buy from C Alpha, strong buy from Wall Street, and the scale of annual payment volume is enormous. We shouldn't confuse that volume with Visa's revenue. Its economics come from providing payment services across the network rather than owning every dollar being spent. And these returns support the quality argument. Visa's growth requires less capital commitment than Micron's manufacturing expansion or Netflix's content spending that strengthens my confidence in the ability to convert growth into cash. And their latest quarter also supports that confidence. Revenue adjusted earnings and process transactions all grew. I don't see an earnings collapse underneath the recent weakness. The operating business that remains healthy. Now, Visa has participated in the broader financial sector weakness. That is consistent with valuation pressure and consumer concerns. Although it doesn't establish the cause of every daily move, price action alone cannot diagnose the business. And the Ford multiple, well, it's below its 5-year average. The discount is moderate, though, so I'm not describing these as distressed or extraordinary cheap, is a quality business at a more reasonable entry valuation. Where on the blue tunnel, we do see it right there towards the bottom end. There were chances to get this below at an undervalued level over the last 5 years. You can see in fact quite a number and competition does remain relevant. Stable coins could change payment infrastructure but Visa is also developing capabilities around them. Their recent Lloyd settlement pilot shows adaption that is encouraging evidence not a guarantee of permanent dominance. Now revenue litigation, client incentives and weaker spending are all still risks. Visa is also exposed to travel through crossber payments. Its predictability is relative to the other companies here rather than immunity from an economic slowdown. Now the base cash flow model values Visa at $416. We're talking around 15% upside a 14% margin of safety. That may sound modest after Disney and Broadcom, but I place more confidence in the business supporting the forecast. Now the model itself, we're assuming 10% annual growth, a slower growth case that gives a materially lower value, but it helps set expectations. The investment needs continued compounding run depending entirely on the multiple returning to its average. What would weaken my conviction? While sustained deterioration in transaction growth, pressure on the network's economics, or competition that undermines its returns, those are the business developments I would watch after buying. My verdict, Visa is the strongest overall buying opportunity at these prices. It combines growth in cash generation with fewer recovery assumptions that earns first place despite offering less modeled upside. So the final order starts with Alpha in seventh. It's a strong business but limited cushion in my model. We then have PepsiCo that comes in sixth. Attractive income but a domestic recovery to prove. And then in fifth place, Micron. Exceptional growth with substantial cycle risk. Disney takes fourth with a larger recovery opportunity. Broadcom that takes third with powerful AI growth tempered by financing questions. In both cases, the potential reward needs to be weighed against the assumption supporting it. Netflix is second after adjusting their cash flow starting point and Visa comes in first. Income investors may put PepsiCo higher in their own short list. This ranking compares long-term total return opportunities. So, the market split is creating choices. Which company would you buy at these prices and what assumption gives you confidence? Tell me below. Don't forget to smash the like button if you enjoyed the episode. Subscribe notification bell on for future episodes. And as always, you can click on the pin comment below, read all of these articles straight away. But more importantly, have a great day. I'll see you all on the next one.