The Most Obvious Stock to Buy Right Now

Nvidia is green, Microsoft is green, but banks, retailers, and consumer stocks are red. We can see the S&P 500 monthly heat map shows why the index can look healthy while many individual investors feel the complete opposite. Now, as we typically do when we change the measure to distance from 52- week highs, we've got Broadcom that's down nearly 30%, Walmart that's down nearly 25% and familiar companies, they've already suffered substantial declines. And then we take a look at this chart. It shows more stocks are making new yearly lows. It creates opportunities, but it raises a question, which businesses are becoming cheaper and which are genuinely becoming weaker. So, today we're ranking seven companies from weakest opportunity to the strongest candidate will connect the news to their results, then examine what today's price assumes about their future cash flow. Now, we're also going to challenge the attractive valuations. The concentration chart here shows how heavily the index depends on its leaders. Their strong prices deserve scrutiny just as much as the struggling stocks. And first we need to understand Friday's rally while borrowing costs remain elevated. This historical chart it shows the climb in yields in fact is the highest that we've seen since 2007. Some data showing in fact going as far back as 2002. Let's listen to this bullish interpretation of the latest data. I >> think you're starting in the right place, which is the 10-year yield. I mean, this bounce back from the teens today and now it's at 526. I think that's just a little muscle memory, Frank. I don't think that's really the trend that we should be looking at because this week we've gotten a lot of data that takes a little bit of the heat away from the Fed in terms of raising rates. At least this month, we got the PCE uh that was a little lighter than expected and then the jobs report today was kind of Goldilocks. It was good enough that we don't have to worry about, you know, a meaningful slowdown, but it wasn't so hot that the Fed really needs to go this month. >> That's the relief argument. Softer data reduces pressure for another immediate hike. Friday's late report still put the 10-year yield above 5.3%. A pause leaves borrowing costs elevated. And while bond volatility, that's picked up while stock volatility remains comparatively subdued. They're separate measures, but the contrast explains why a calm headline index deserves closer inspection. And you can see the imbalance in this monthly heat map. Large technology stocks remain strong amid widespread declines elsewhere. This clip explains the competing forces and why stock selection matters. >> Yeah, I mean, I think you're alluding to there's basically two tugof-wars happening right now for markets. I mean, one tugof-war is is rates and growth. And today, you know, the growth story kind of lost a little bit there. And then the other tugof-war is AI versus everything else. And and the AI story is absolutely holding up the markets and it's holding up the earnings story. Um, but when you go outside of that AI trade, it it it's not just small pockets. If you look outside the US, most major markets are down significantly. And you look at the RSIs, they're kind of falling off very quickly. And that's happening in pretty much every segment outside of outside of the AI story within markets. So I don't think it's just isolated pockets here. >> Now this table from Goldman Sachs, it assigns Nvidia and Micron roughly onethird of expected calendar year earnings growth between them. That's their combined share of growth. The market depends heavily on these companies delivering where the market's gains have an earnings foundation. We can see here positive earnings partly offset by falling multiples. Now profits can support prices even as investors demand better value. So really, we need to investigate both sides. A beaten down stock might still ask too much of its business, and a company near its high might have earnings growing faster than its share price. And this year-to-ate map, it shows how different the journeys have been. Our ranking examines the business behind each ticker. And this final clip distinguishes a growth label from actual business growth. I I loved what he had to say because growth is there's the index labels of growth, but then there's the actual fundamentals of growth. And >> right now you've got a big divergence in the growth indexes and the value indexes >> um because of how they're constructed. And the point the professor made was just because you're expensive doesn't mean you're a growth stock. So, here's our framework. What explains the share price move? Do the results support future growth? Does a valuation leave room for disappointment? We'll use those questions across all seven companies. And we're going to begin with a business people turn to when the economy becomes uncertain. Its scale and reputation are impressive. At the price today around $104, that reassurance, it carries a substantial cost. Now, Walmart, it does take seventh place. And we can see it's trading around 35 times Ford earnings against a 5-year average around 25. Despite the decline we've seen from the company, investors are still paying a considerable premium for the business today. And when we look at the data from Simply Safe Dividends, the blue tunnel highlighting intrinsic fair price. Well, we can see the stock price today sits above. So, there's a disconnect. In fact, investors are paying a premium. If we go back the last 5, 10 years, last time this one looked undervalued was 2022. It is a company more often than not, as we can see going back the last 10, even 20 years. Investors typically pay a premium. Very, very rare to see it in an undervalued level. Now, the company is down 6% year to date. Over the last year, pretty much flat. Over the last five, up more than a double. And over the last 10, is up 355%. It is also trading towards 52- week lows. And even though we get a hold rating 2.6 pretty weak as well at that from seek Alpha Wall Street they disagree 4.46 near the 4 and a half to flip it into a strong buy and with that their average price target comes to $127 implying $22% upside although whilst we get some analyst more bullish 155 price target the more bearish sit as low as $81. And their latest comparable sales rose 2.6% 6% below expectations. The August earnings report triggered a sharp sell-off despite higher annual guidance. So as strong business, it can disappoint when expectations are demanding. Now their latest quarter earnings, it does still show revenue growth alongside growing e-commerce and advertising. So Walmart has several ways to improve profitability. I take the slowdown seriously while recognizing that those strengths, they still remain valuable. Now compare those opportunities with the forecast. We can see forward revenue expectations 5.2% long-term EPS expectations sitting around 10.3. Now those are respectable expectations. But do they justify the premium that investors are paying? Well, when we run it through valuation model, we can see the cash flow value comes to $79 and the multiples estimate comes pretty similar to around $80. We can see the share price today actually sits above at 104. The valuation for Walmart, that remains my concern. I mean, if we go a little bit deeper and we look at the actual free cash flow, well, we've used what you could argue is a fairly optimistic rate at the midpoint at 15%. The discount rate, well, we've used 8%. And even at 8%, because you can argue it should be 9 10%. Well, we still see downside solely on the DCF. We're talking 24% where the total value comes to $79. And the dividend, well, it offers limited compensation for waiting. The yield is below 1% beneath the historical average. Investors rely mainly on earnings growth and the premium multiple holding it up. And we can see the reverse DCF estimates the growth needed to justify today's price roughly 18%. Buyers are paying for considerable execution. The earlier price decline that we've seen from the company hasn't really removed the hurdle and the higher dividend valuation, it lifts the blended estimate close to $99. Averaging methods don't remove their assumptions. I give substantial weight to the lower cash flow and the multiples estimate. Now with the company, we can also see there's no margin of safety at premium of 5% today. I'd become more interested if the price offered a clearer cushion or profit strengthened enough to support a higher valuation. Today, business quality is easy to vent than the entry price we're seeing. My conclusion, Walmart stays on the watch list, seventh at this price. Our next company, though, has strong evidence of customers returning. We need to check how much recovery investors already anticipate. And before we dive in, just to let you know, we released one weekly article covering severely undervalued stocks as well as what's been in the market over the last few days. You can click below, sign up, read these straight away. Now, Starbucks is number six. Shares are up around 12% this year. Investors have rewarded the recovery. Our task is to decide whether the business has improved enough to justify that confidence. Over the last year, it's up barely. Over the last five, it's down 15%. over the last 10 years, not great. You would have massively underperformed the S&P 500, trading midpoint of the 52- week range. One very weak buy from Wall Street. And this sales chart shows why the sentiments change. Comparable sales has moved from contraction into accelerating growth. That's useful turnaround evidence. Better performance gives investors something more concrete than a strategy announcement. And their latest comparable sales well it rose 7.9% including transaction growth of 4.2%. More visits strengthen the recovery case management they've also raised guidance increasing confidence that the improvement can continue. Now the weaker growth grade it doesn't tell the whole story. Different periods mix a difficult path with an improving outlook. Look at the individual forecast and recent results alongside that grade. Now in terms of forward valuation is trading 32 times above its historical. The yield is about 2.6%. Investors already anticipate stronger earnings. So the price needs a substantial recovery for which on the blue tunnel whilst we don't see the massive disconnect on the upper end that we saw from Walmart. It does still trade just above the upper point of the blue. So what we are noticing here investors for a long time have been paying a premium. Last time it was actually reasonably undervalued. beginning of 2025, undervalued during 2024, but actually the underlying performance, it hasn't been consistent at all. Now, the models do remain less enthusiastic. Cash flow, well, that's it at $74 with a blended estimate sitting around 72. Even the dividend valuation, that's coming at $87. That's below the share price today at 94. And solely looking at the free cash flow, well, the starting forecast based on analyst projections 3.4 4 billion that already assumes recovery from the 2.4 billion in 2025. The model then adds around 9% growth moving forwards. It's a meaningful improvement for Starbucks to deliver. So in totality, there is no margin of safety. Once again, we're actually seeing a 31% premium. Although Wall Street, they disagree. They see 18% upside, a price target on average of $112. Now Starbucks, why does it rank above Walmart? Well, because its customer recovery is measurable. The recent direction is encouraging, but I still want valuation room if those stronger comparisons become harder to repeat next year. And you can see the reversed DCF while it points to growth around 12%. That's above the central assumption here of around 9. So buying here means expecting more than our base case. So yes, Wall Street, their target is higher, but the cash flow work well while it sets a tougher hurdle. A better price or further earnings delivery could close the gap. The improving business deserves continued attention. My conclusion, Starbucks has an improving turnaround, but stays sixth on valuation. Next comes a cheaper historical multiple in high yield. The operating problems explain why that discount exists. And McDonald's ranks fifth. Shares are down around 24% year to date. A substantial reset for this familiar dividend business. Starting valuation is interesting, but we need to understand the operating pressure over the last year. down double digit over the last five down 5% over the last 10 just about a double trading pretty much at the 52- week lows where whilst we get a double buy from seek Alpha and Wall Street both them on the weak end now earnings are roughly 17.5 times here against a historical average above 24 the yield 3.3% investors receive more income and pay less per dollar of earnings is also the highest yield in the last 5 years the lowest valuation in the same period too where On the blue tunnel, we see severe undervaluation, something we haven't seen going all the way back to the beginning of 2024. And we also notice during the co drop, this one still stayed within that blue tunnel. Now, the next plan provides around $8.5 billion of support through 2036, including 5 billion through 2030. Rent relief and capital support help franchises with costs for McDonald's, too. Now, their September strategy update warned of flat industry traffic while inflation stays elevated. Execution shortcomings and an earlier US sales growth myths reinforce the pressure. Management has tangible problems to solve. Now, trailing earnings, they have held up better than the share price. Investors are questioning future growth and profitability even though historical earnings remain resilient. It makes a discount worth investigating. Now, longerterm earnings growth, that's forecasted to be around 7%. It can support worthwhile returns at a sensible valuation, but it does offer less room to overcome persistent traffic weakness or higher support costs. Now, the dividend history, it is attractive. Annual payments increased over time while the falling price lifted the yield. It improves the income proposition provided cash generation continues supporting those payments. And the blended estimate comes to $296. We can see the cash flow does come in much lower $246. Now the gap here does matter. The apparent upside depends heavily on the valuation method that you ultimately trust. And these commitments have an economic cost. Rent relief and capital support can help franchises recover. But improving restaurant performance must justify that investment. I want to see the benefit in future cash generation. And we can see the reverse DCF for MCD comes to 8.2% which isn't too far off the growth rate at 9%. Hence why we don't see a massive margin of safety. Now here's the opportunity and risk together. Price fell far more sharply than trailing earnings. If profitability holds that helps returns. If earnings weaken later the apparent discount can shrink. Now McDonald's does deserve consideration for income. In this broader ranking, I need more operating improvement before placing it among the strongest opportunities. The cheaper multiple helps, but the recovery still needs execution. My conclusion, McDonald's is an income and recovery candid in fifth. The next company is stronger growth expectations and a different demand driver. Its challenge is the optimism already in the price. And at number four, it is ASML. Shares are up around 75% year to date. Investors have rewarded its position in semiconductor manufacturing. After that rally, the strength of the business needs an equally careful valuation assessment. Over the last year, up 81 over the last five, up 162 over the last 10, up more than 1,600% sitting not too far off 52- week all-time highs around $2,000. Strong buy from Wall Street, weaker buy from CE Alpha and equipment and installed based services feed substantial profits. Customers need ASML's capabilities to manufacture sophisticated chips. Their expansion plans create demand while their investment schedules affect its delivery. Now, forward revenue growth does approach around 28% with longerterm EPS projected around 31. These forecasts give ASML a stronger growth case than the consumer businesses, but we still need to assess today's valuation. Now, also worth highlighting, management raised their fullear sales outlook to 43 to 45 billion euros. Stronger order intake and custom expansion supported the increase. It helps explain investors willingness to pay more. Now, the research spending chart shows the ongoing investment behind the technology. Maintaining ASML's position requires substantial spending. That investment needs to protect future profitability and remains a cost of sustaining the business. Now ASML has maintained substantial operating profitability in margins is a quality indicator is business though differs from TSM's though so comparing their margin alone doesn't establish which stock offers better value and the forward multiple sits around the 5-year average and the low dividend yield makes clear that returns rely primarily on growth. Earnings estimates must translate into future cash generation for which ASML's blue tunnel we can see here sitting around the mid to upper end. So potential reasonable signal and the cash flow value comes to $1,118. It gives very minimal in terms of a premium talking around 3%. So there's little cushion if the assumptions disappoint. In terms of the central case, medium sitting at 15% the reverse valuation while we can see slightly more 15.3. So ASML's demand outlook helps explain the price but the model we have doesn't establish a substantial bargain. Earnings growth forecasts exceed our cash flow growth assumption, but those measures differ. Investment, working capital, and delivery timing can affect cash generation. I'd watch those factors alongside headline growth when assessing the valuation. Now, 10% growth produces a value of $1,200 downside of 34%. And we can see 20% $2,600 around 43% upside. The wide range here, it just shows you how much your investment outcome depends on ASML's sustained cash flow growth. ASML ranks above McDonald's for its stronger demand outlook. It stays below the top three because the central valuation leaves limited room for error after the substantial share price rally. My conclusion, ASML is a quality watch list candidate in fourth. Next, our model suggests substantial upside with the low growth assumption. It makes the company's existing cash flow particularly important. And Salesforce comes in number three. Shares remain down. We're talking 11% year to date, but they've recovered substantially from the lows when it was trading at $146. Today, we're going to assess the price, the earlier, more distressed entry point. That's already passed where it's around the mid to upper end of the 52- week range. Over the last year, flat over the last five down, over the last 10, up 230% where we get a respectable buy from Wall Street. and seek Alpha coming around four out of five. Now forward earnings, they're sitting around 16 times here, still below the 5year average of 27. It makes Salesforce interesting. We need to examine how durable and representative the forecast earnings really are. And if you look at the blue tunnel still, even with the slight recovery showing severe undervaluation, look at the last 5 years though, the last 10. This one pretty much peaked around 2024, although we are starting to see a slight turnaround. Now revenue has grown substantially over time. We can see the latest slope less dramatic than the earlier years. The investment case must work with Salesforce's present scale rather than extrapolate its fastest historical growth. Now we can see forecast revenue comes in around 10% and stronger earnings growth coming in around 1718. Margins and a smaller share count can help earnings grow faster. We need to examine what drives the difference. Now, the latest quarterly revenue grew 11% while current remaining performance obligations grew 14%. Those contracted commitments provide demand evidence future delivery and cash collection still needs to follow. An AI and data annual recurring revenue approaches $4 billion. It includes Informatica, while Agent Forc's definition now includes additional offerings. Read those changes alongside the growth rate when assessing how much acceleration is truly organic and work unit shows sharply rising adoption by measuring tasks performed. The financial test is what those tasks earn. More usage becomes valuable to shareholders when it produces incremental revenue and worthwhile profits. And Salesforce generates substantial cash and repurchase shares. Buybacks can benefit each remaining share. But financing matters. Capital allocation deserves attention alongside the growth in cash generation. Now, latest adjusted quarterly earnings includes a sizable strategic investment gain separate from recurring software profitability. It makes the headline increase less representative of operating growth. We got to examine earnings quality alongside the low multiple. And Salesforce linked it reduced cash flow growth outlook to debt issued for the accelerated buyback. borrowing enables a large repurchase quickly while financing costs make future cash flow growth less impressive. Now, the model we have here starts based on analyst projections of $15 billion and then assumes only 2% growth moving forwards. That comes to around $300, which is also 29% upside and a margin of safety coming to 23%. Basically telling us Salesforce attraction is straightforward. The model needs modest growth to produce a meaningfully higher valuation. And then if we were to change the discount rate from 8 to 9% well it is sitting slightly higher not massive in terms of upside or margin of safety but it's an additional sensitivity. So Salesforce earn s through modest growth supporting a higher modeled valuation. The next two rank higher because their operating results provide stronger support for the growth forecast. My conclusion Salesforce is a valuation candidate in third. The runup offers faster growth in substantial cash generation. A recent financing agreement adds a specific risk to that semiconductor opportunity. And that's Broadcom coming in second. The annual gain here is small 2 3% but the fall from its high while that substantial we can see wasn't long ago trading just below $500. We need to separate the business performance from the more demanding expectations investors had previously priced in where we get our first double strong buy. Wall Street One very respectable buy from Sega Alpha. This one over the last year up only 5% 646 over the last five up nearly 2,000% in the last 10 and forward earnings around 2021 times here below the historical 24. The yield is low so returns depend mainly on growth. The earnings forecast needs to be credible for which the blue tunnel is showing an undervaluation signal. Again, one of those companies that historically has traded for quite a large premium. Last time we saw this undervalued while potentially mid 2022. Now their forward revenue growth is close to 50% with longerterm EPS coming in at 55. The stronger growth explains why comparatively ordinary multiple can attract attention. Delivery remains the test. Normalized earnings increase while the forward multiple fell from its peak. That combination can create value if profits hold up. The forecast beneath the multiple needs to support the opportunity. Latest quarterly free cash flow was around $13.7 billion with revenue growth of 86% brought a substantial reported performance supporting the thesis alongside more ambitious expectations for future quarters and customers want custom chips tailored to their workloads potentially improving efficiency and cost. Brogon participates in that spending and the networking connecting large computing systems. Those capabilities support its growth opportunity and projected AI semiconductor revenue reaches roughly $115 billion next fiscal year then 230 billion those are enormous forecasts the projected sales they've not been earned yet and these future earning bar rise dramatically buyers rely on substantial delivery assess the price against both the reported foundation and the steep expansion which is projected in future periods and remember these Industry spending forecast span computing, data centers and power. Broadcom share profitability and customers funding will determine how the investment translates into returns for shareholders. Reuters report an agreement to provide anthropic financing of up to $42 billion potentially through a partner that links part of rocom sale opportunity to funding its customer spending. The entire facility hasn't necessarily been funded, but growth deserves a closer credit risk check. I want customers able to sustain their spending alongside clear disclosure of Broadcom's financing exposure. Now, the model starts at $48 billion from analyst projections against what we saw in 25 at 27 billion. Now, recent performance supports the direction. The full forecast though still needs delivery where that gives us a value of $456 against today's share price. Well, we're talking 22% margin of safety. Although Wall Street they see it much higher $531 we can see upside of 50%. Now if the growth slows to 10% well we can see $320 that's below the price 20% while $644 this scenario table it makes sustained growth central to the opportunity but also the potential downside. So Broadcom ranks above Salesforce on stronger growth evidence and substantial cash generation. It below average multiple also helps customer concentration remains an important part of the assessment and changing the discount rate from 8 to 10% while it takes a value to around $36. The additional calculation here it shows how a higher required return reduces the apparent discount. So in my conclusion, Brocom is my runner up with strong growth and financing risk to monitor. First place goes to a company whose rising price can obscure the improvement in the earnings capacity. Nvidia is my first choice amongst these seven and it has been for quite some time. Shares up 25% year to date, up 24 over the last year, over a,000 in the last five and up nearly 14,000% in the last 10. The appeal comes from the business supporting today's price rather than the size of the gain. It's also trading not far off all-time highs. Another double strong buy from Wall Street Quant C alpha four out of five buy signal and forward earnings are roughly 19 and a half times against a much higher historical average. Expected earnings have increased beneath the rising share price. Understanding that relationship, it matters more than the price alone for which maybe unsurprisingly we still get a severe undervaluation signal. I mean look at the last 5 years, last 10 years. This one's been trading undervalued for quite some time, while the underlined metrics, well, they've only continued to go higher and higher. And this historical chart shows investors paying less per dollar of estimated profit as forecast expanded. A higher share price can coexist with a lower multiple when earnings expectations grow faster. Now, forward revenue growth exceeds 70% with long-term EPS above 50%. These are forecasts supported by exceptional recent performance. Their credibility is central to Nvidia's place in this ranking. And their latest quarter revenue grew 106% with a 75% gross margin. Those company reported figures give the growth case a strong operating foundation alongside the Ford estimates. And custom chips and AMD expand here. While Nvidia's estimated deployment also grow substantially, a larger market can support several suppliers. Each needs to deliver that capacity profitably. and computing needs electricity and functioning infrastructure. We can see here it illustrates the power required. A chip order needs an operational data center before it can support productive computing and revenue. Now obviously competition matters through growth in margins. Nvidia can expand while alternatives gain ground. Its pricing power depends on how customers increase their choices and negotiate spending. and Nvidia reported roughly $70 billion of first half free cash flow with considerable quarterly variation continued cash delivery matters simply annualizing the strongest quarter it would give us an unreliable starting point now as you'd expect the model starts based on analyst targets of 180 billion is a substantial forecast increasing than the historical figure just shy of 100 billion and that is the key starting assumption behind this valuation revenue and owner cash flow follow different paths. Working capital, investment, and customer funding need to support earnings expansion. Revenue forecast alone don't establish the cash flow outcome. And after the initial forecast, again based on analyst projections, the next three years grow roughly 15% later growth slows to around 12%. Where we get a value here of $33. You can see that implies around 30% upside. Well, the interesting thing to note here is if you believe it slows to 8%, well, we get $254, which is still above today's market value coming in at $233. An additional buyback authorization, recently supported sentiment, actual spending, and prices paid to determine the share the benefit. I want capital returns supported by durable cash generation alongside business investment. And if we were to change the discount rate from 8 to 10% while the value would fall to around $27 is an additional sensitivity with the cash flow forecast everything else unchanged. So the central estimate suggests an opportunity but a high required return changes the conclusion. I would assess both before deciding how much to invest. Nvidia stays first on demonstrated growth and profitability. Customer funding and competing capacity remain risks. its own compute financing initiatives deserve scrutiny alongside Broadcom's exposure. My conclusion, Nvidia is my preferred buy candidate among these seven at the prices today. Cash flow delivery remains the condition behind the choice, Brocom is the closest alternative with Salesforce third. So what does the ranking tell us? While Walmart's decline hasn't removed its valuation premium, that's the lesson to carry forward. A familiar business and a sizable fall still need support from the cash flows you're paying to own. McDonald's offered a cheaper multiple and more income with operating problems to solve. Its middle position reflects that trade-off that even helps while business performance determines the outcome and Broadcom reached second through growth and substantial cash generation. The financing exposure needs monitoring. It gives significant potential with a specific risk to examine before committing to the investment. and Nvidia finishes first on operating evidence. The discount rate check shows what could undermine its valuation. I'd revisit the assumption alongside the cash flow forecast before deciding how much to buy. Now, let me know in the comments which seven would you investigate first. Tell me the company and the assumption you challenge. And don't forget to smash the like button if you enjoyed today's episode. Hit the subscribe and notification bell for future releases where a fresh copy is coming tomorrow morning. So, make sure you click on the pin comments, sign up below. More importantly, have a great day. I'll see you all on the next one.