Watch our Earnings Recap on NVIDIA, Lowe’s, Morningstar, IonQ, Photronics, and More

Let's get started. A lot of action today, so we'll start with Nvidia. This is probably one of the most popular stocks in the market, and I think folks who are familiar with New Constructs know that we've had a lot of research we've done on Nvidia in the past, and it is clearly Great company, bad stock. That's what this means. We've seen this kind of stuff quite a bit, and we've been saying this for a while. We saw this with Supermicro back in August before they revealed that their auditor was going to quit them or fire them. Unbelievable. By the way, there's a great article from Matt Levine in Bloomberg today about an auditor and a client and how that, that interaction went down. But yeah, very rare. For an auditor to fire their own client. That's how they make money. People pay them to audit. So you don't really usually want to get fired by your client. And so anyway, we've done some great work on this one. I'm going to pull up the model. I'm going to pull up a report we wrote where we were looking at the stock and calling a top at around $120. It's gone on past that. It's come back down to it. It's gone back up again. It's back down again. But I want to, I want to make sure it's clear. Very strong business. Great economic earnings. Now, economic earnings are not above accounting earnings. Note, when that happens, that's a signal that indicates really strong stock price performance over the next year. We have a special bundle out right now that's selling access to stocks that meet that criteria. We did that back in September. Those stocks outperformed like crazy. One was up 60%, one's up 70%, something like that. Great performance. Now, Nvidia doesn't get that. So it's not quite there. But an expensive valuation, not surprising. The credit rating is awesome. So what I'm saying here, folks, is I'm not saying this is a bad business. Great business. They're doing great things for the world. But all that is priced in. What do I mean by that? Well, let's take a look at this model. And I've, I've already put together some scenarios here for different revenue and profit improvement. And so What these are based on are taking a look at market expectations out into the future. You can see this neutral scenario is really close to where the market has been. Let's knock that up to 109 and we'll make this 40. And you can see the rest of those are plenty high. And then there's also the article we wrote recently about how DeepSeek is a wake-up call. For all these AI companies. And, and the really the big point I'm making here for all the popular AI companies, not the one we're going to talk about as, as our top pick in AI, but the popular, the crowded trades, right? They're so crowded that they're effectively pricing in 100% or monopolistic market share for multiple companies. They can't all have a monopoly. Probably none of them will. And what I'm really trying to point out here is there's a lot of false narratives out there, folks. We see false narratives around the healthcare sector. We see false narratives in politics. We see them everywhere in the news. So why are we surprised that we also see them in the stock market? What are these false narratives typically intended to do? Make certain people money, preying on your naivete. That's what's happening with the stock market as well, with a lot of stocks, especially from Wall Street, CNBC. They just want you to pile in. And so we've done some, I think, extremely good work around Helping people debunk these false narratives, and and I walk through how to use a reverse DCF in this article here. If you guys haven't seen it, I'm going to pop it into the chat here so everyone has it and can see it. But what I walk through is the very detailed analysis like what I'm going to show you live today, and really it's about how reverse DCF model is a weapon for you. It's an advantage. Think about you know Wall Street and CNBC and the news. They're like shooting false narratives at you all day long. You need stronger firepower because Wall Street, CNBC, they got a lot of firepower, a lot of firepower, a lot of money, a lot of influence. You need superior firepower. We give it to you. We give it to you in this reverse DCF model, which looks at the expectations embedded in the stock price. In other words, the future cash flows required to justify that price. And when we run this model, On today's price, based on the, the numbers we gave you, let's just go with the neutral scenario because that was super optimistic. So in order to justify $131 stock price, the company has to grow revenues at 25% compounded annually for 16 years and maintain a return on capital versus cost of capital spread of 693% over that time frame. So what does that really mean? This chart here plots the values implied for the stock based on our reverse discounted cash flow model. So a big difference in our model is that we don't just look at 1 year to your 5 years or 10 years and force every company into a 5-year model. We say, no, no, wait, let's just relax the assumption around how long a company is going to grow its profits and look at multiple scenarios, 100 different scenarios, not because we're predicting the future, No, because we're casting our net wide enough to capture what the market is predicting. And by the way, we can always jack up the growth rates over the near term to make sure the model will produce a value within 100 years, which is what we have to do compared to the default scenario, which has really reasonable extrapolation of past performance and consensus estimates. And you can see if we're looking at that default scenario, we can't get much above $40 a share. And yet we're trading at 131. So let's put both of them on neutral because that's easier to see. And then we can go in and look and see what the implied revenue is here for this neutral scenario. The implied revenue is $2.3 trillion. $2.3 trillion in revenue would rank Nvidia as the number 7 Number 8 economy in the world. That's a lot. While also seeing returns on capital improve. So what's the implied return on invested capital? It's got to go up to, oh, you know, a cool 1,246%. So simultaneous high revenues, super high revenue, and improvements in return on invested capital. How many companies in the history of the S&P have had a return on capital greater than 1,000%? Anybody know? I'll make it easier. How many companies have had a return on capital greater than half of that, 600%, in the last 5 years? If you guess, your vote for stock will be weighted times 2. I've got a 0 and a 5. 0 companies. 0 companies. And the best company is a stock that's still got a great ROIC. They've got over 500%. It didn't last long. It's already dropped down below that. So this is an extraordinarily high return on capital while also becoming the 7th largest country in the world. I'm guessing we look at revenue here. Look at this hockey stick. I mean, it's not like their revenues is anything to sneeze at now. It's $113 billion. But look at this trajectory, $2.2 trillion. I wonder what the entire semiconductor market is supposed to be at that point in time, right? So what kind of market share does it imply? It's not hard to do the math on that. All you got to go do is look up market share, total market for semiconductors, or, you know, the total addressable market for Nvidia, and, and bam, you've got this number. So this tool is super powerful. The takeaway is, are we surprised to see Nvidia stock down so much today? What's it down to? Where we called the top. Come right back. Why? Even though they put out good numbers? Because the stock's priced for perfection. You can't beat expectations when they're already that high. And when I'm saying expectations, look, forget what Wall Street earnings are for expectations. Those numbers are a joke. I don't know if any of you have ever heard on one of my webinars my experience with Wall Street earnings. While at Credit Suisse during the tech bubble, I had an analyst tell me flat out, oh, David, don't you know how it works? For the stocks we like, we purposely lower our earnings estimates so we can make it easy for them to beat. I said, what are you talking about? He said, you know how it is. Stocks go up when they beat. So if we want our stocks to go up, we got to have a low number. Like, well, how does that work in your valuation models? You got low numbers. How can you justify a higher stock price? Oh, well, we use a different set of numbers that we share with our institutional clients. For our valuation model. I said, oh, I see. So you have 2 sets of numbers? Yeah. And so anyway, that was part of the indoctrination of David Trainer to the way the markets really work or the way Wall Street really works. And part of why I created New Constructs, because if those people who really are supposed to be stewards of the capital markets are ripping you off, purposely misleading you, then we have some real issues with the integrity of our stock market. And we do. And that's what I'm here to help with. to restore that integrity by giving you the honest truth. And that's what we're doing with Nvidia. So when you're dealing with a stock, good company, bad stock, this expensive, I would say I wouldn't own this really almost any— under any circumstances unless you believe they're going to basically take over the world, in which case, go for it. If you believe they're going to do better than $2.2 trillion with a 1,200% return on invested capital, then you should own the stock because then it can potentially do even better than what the stock price implies. Now, by the way, for the stock price to go up a meaningful amount, right, to be worth holding, they got to do significantly better than that $2.2 trillion in revenue and 1,200% return on invested capital. Significantly better than that in order for the stock to have a fundamental justification for rising a significant amount. So you want to buy low expectations and sell high expectations. This is super high expectations. How about Lowe's? Neutral rated stock, similar situation. Good company, bad expensive stock. Not like Nvidia expensive, but of course nowhere near the potential upside of an Nvidia either. So let's take a look at Lowe's. I think they, they beat expectations, but they didn't have a great outlook either. Same with Home Depot. Look, I mean, that's the story these days, I think, for a lot of these companies. It's a business might be good, but it's hard to believe that it's going to stay good given how we've been in sort of a Goldilocks economy for so long. And now we're seeing some real headwinds. that could break that narrative. Note we had an earnings distortion score miss, which means that we expected either the outlook or the numbers to be lower than expected. That's based on our proven superior core earnings analysis. Whoops, wrong tab. Earnings distortion. We can see here accounting earnings are above our core earnings. That's not good, and that's why there's a miss. Call on that. They're more different than most companies, which is why you get a miss. It's a lot of math that goes into this. Charts aren't that sexy, but you can trust the math because it was done by Harvard Business School professors. There's an index out there that's all based on entirely on core earnings, and I think if you take a look how it's performed year to date, it's up twice as much as the S&P. Well, well, 3 times or more. Almost five times, so it's doing it's doing great. I think the market cares about the truth, right? I think society in general, you might say, cares a little bit more about the truth as we've seen a lot of the false narratives that have been dominating all so many elements of society being debunked. I think people are now kind of waking up to the fact that oh, I'm getting fed a false narrative here, here, there, there. Yeah, in the stock market especially, in the stock market especially, lots of false narratives. So yeah, focus on core earnings, not reported earnings. Newt Nix suspended rating. All right, whoa, 61.2. Okay, so that's a really— oh my gosh, that's super expensive. We gotta take a look at a model on this one, but I think this stock is up. Yeah, it's up today. Revenue surge as VMware customers flee Broadcom acquisition. Well, they've got a good narrative on this one. They've got a good narrative breakout on strong earnings guidance. Stock's up. I think this might be a good time, good time to take gains. We had a strong beat call, so we nailed that one too. It's good to know we're doing it on the top end and the bottom end. Let's see here, core earnings above accounting earnings, that's good, but I would tell you it's more than priced in. I mean, let's take a look at a Nutanix model here. Let's see, I've got a negative margin, so margins get better. Let's go with a neutral scenario that gives them, let's say, I'm going to say 50, 50, 50, 50 for the next 15 years. And let's let that drop down to 20. 50 is crazy. Let's make that 40, 30, 30, 30. It's still crazy numbers. We'll leave the margins the same. We'll save that off. Let's see what that implies. This is again a good company, bad stock. Look, ooh, economic earnings greater than accounting earnings. That's a good sign. If it also had a very attractive or attractive rating, it would qualify for our Super Stock Bundle 2.0, which is stocks that have economic earnings greater than accounting earnings, which happens so rarely that we don't even have a way to screen for that easily in the system. If you've been with us for a while, you know we did Super Stock Bundle 1.0 back in September. That, that portfolio strongly outperformed the S&P. We had a couple stocks up right away too, like one of the, the number top pick, which when you sign up you're going to get my top pick for 2025. The top pick back in September for the first Super Stock Bundle was up like 20% in the first 2 months, 30% in the first 3 months. So I wouldn't sit around here. These stocks can move really fast. Again, all part of a market that's becoming more rational. Becoming more discerning of false narratives. All right, let's take a look back at this Newtonics model. All right, so that neutral scenario gets us there in 10 years. We'll put this all in here in neutral. Look at this. So you can see the stock price is moving, moving up. There's the implied share price, right? That's the stock price that's lowest, but closest to, but still lower than the current stock price. And so we can take a look at the implied revenue here. $49 billion. So that would put it around like 60th or 70th in the S&P. What would that return on invested capital have to be? 430%. Really high. So there's some really high expectations. Maybe you think they can do that, right? I've got a model here for the S&P 500, and we can look and see. So return on invested capital gets up to 431%. That would rank as number one in the S&P 500. There's that company I mentioned to you that used to have above 500, so it would be the most highest return on capital business in the S&P 500. Sort by revenue, and what it was at 48, 49 billion. That'd be rank right around Nike, where Broadcom is. Broadcom's return on invested capital for comparison is only 8%. So it would have simultaneously a top-level revenue and a top-level return on capital. Anyway, that's really expensive. Again, potentially you think it's worth it, but that's what you got to believe, that they're going to do better than that. So I think there's a lot of good news priced in there. Morningstar, one of our competitors, so take everything I say with a grain of salt. We've got another good example here. You've got good company, bad stock. Ooh, weak internal controls. So we had to suspend the stock rating on this one. That's a bad sign. That's what sent Supermicro Computer down. We got a strong miss here. How did Morningstar do? What's happening with Morningstar? Morningstar down 2.75%. Weak internal controls, folks, is a big red flag. That's the auditor who gets paid by the company, the client, the client, the company. They're getting paid. And they're saying publicly in the filing, we don't believe that we can trust the numbers the company's giving us to perform this audit. I don't know if it gets much worse than that. We got a high valuation here, 4.9 price to economic book value. Not good. Economic earnings going up, which is great. So you could potentially extrapolate that. Now accounting earnings going up even faster. So that's not good. That's why the earnings distortion score is saying, yeah. Boom, right? Accounting earnings going up way faster. That's why you're getting a strong miss here. Return on capital, not great. It's not a high return on capital business, especially considering it's in the information business. You think it'd do a little better than that. Margins up, capital turns up. Let's see what kind of free cash flow you got here. It's okay, not too impressive. So I would say it doesn't deserve this valuation, pure and simple. Expensive. Stay away from that one. All right, how about let's look at attractive stock? Let's do it. We're getting a new 10-K. A lot of 10-Ks are coming in. I think we did like 500 today for all the major publicly traded stocks. Decent company, decent valuation. I love it. This 1.0 price-to-economic book value ratio, you know what that means? The current stock price is implying zero profit growth. So if we go into the model for a company like this, we're gonna have a very different situation than what we had for NVIDIA, where you got crazy revenue requirements and return and profitability requirements. But when we do this for UHS, we're going to get something that shows not a lot of growth required. So the reason this can have no growth and this can be in 11 years is we're probably forecasting a decline in margins and very limited profit growth. So it takes a while for the company to earn that. So a couple questions about NVIDIA. Yeah, I thought it was pretty clear. Super expensive stock. I think it'd be time to take gains for sure. All right, so let's take a— we'll take another quick look here at UHS. There are no different scenarios here, and, and so the current stock price implies revenues are going to keep going up pretty straight. What does it say about NOPAT? So NOPAT not going to go up much from here, so pretty limited growth. Interesting. That's a price-to-economic book value of 1.0, so I think The present value of that notepad at this point in time is effectively equal to the current value. That's what that's telling us. So effectively, no risk-adjusted growth. No risk-adjusted growth. Let's talk about IonQ. So we did actually a deep dive on this based on a meeting with our professional clients. We do a monthly call with our professional clients called Let's Talk Long Ideas, and we do deep dives on a couple stocks and Had some amazing, great ideas that have come out of that meeting. It's a lot of fun, sophisticated investors. It's a pretty awesome crowd, let me tell you. One of the stocks that came up was this IonQ stock. And we— and I came in and I saw this, I'm like, oh, this looks terrible, bad business, blah, blah, blah. Then when we did the reverse DCF, it was expensive, but because the company's so small, the future cash flows required to justify the stock price Only put it ranked like 220th in the S&P. So the stock price is, is priced as if it's going to be the 225th most profitable company in the S&P 500, or 200th or so. That's probably very possible for a company if it does super well as the next quantum computer comp— quantum computing company. But it's important to understand that the current valuation is giving it credit for being the dominant quantum computing company. So that's already priced in. So I, I think that means that when we look at what happened to INQ today, yeah, it was down a lot, down about 28%. So even after being down quite a bit yesterday, it's down again more. And even after that drop, my friends, it's, it's still getting a really Pretty negative rating. Keep in mind, one of the knocks is that they cushed it on revenues, but they're still hurting on profitability. It's going to be a tough business. I mean, think about what's happening— things about Nvidia's valuation and its cash flows. By the way, it generates a ton of cash flow. Oh my gosh, free cash flow is awesome. And same is true for Microsoft and Meta and Apple, right? What are they doing? They're just going to let some upstart like, oh, quantum computing, let's let IonQ do it. Great. They do all the work. Let them have all the profits. Let's just do that. No. They've announced they're spending billions on AI, and I'm sure they're gonna spend billions on quantum computing as soon as they think it's feasible for that science to actually have a practical benefit in society. So, IonQ may seem like it doesn't have a lot of competition, but that competition is just around the corner as soon as IonQ proves enough of the market to make it worthwhile for the big guns to invest. So there's not always a lot of benefit for— to being the, the leader, the trailblazer. The fast follower strategy is often much more profitable. And that's the luxury of being one of the big super profitable businesses these days is that you can wait till the upstart company has taken all the risk, proves the market, and then come in and do it on your own. Now you might pay a big premium for that stock to own it and then get in that way. That might be an easier way. But a lot of what we're seeing, especially, you know, in with the more and more with the Mag 7, is that they're building rather than buying because they kind of need to build at a scale that nobody can bring anyway. All right, what do we got next? Steve Madden. Thought we'd put in a fashion stock here for folks that like that. You know, it's a good old shoe company. Good company. Good stock, attractive rating. Could I say not a lot of high expectations baked into it? Credit rating looks good too. Let's see what our trends look like here. Economic earnings up and steady. Return on invested capital took a little dip during COVID Nobody was shopping much. They came back at it. Profits came right back. Margins same way. Capital returns same way. Free cash flow. How does free cash flow look? Wow! Consistent free cash flow. Boom, boom, boom. Positive all this time. It's great. Price to economic book value ratio. This would have been a good time to get in right when the stock price was below the economic book value. That's always a great sign. It's obviously done well since economic book value has come down, but it looks like it's coming back up. So what this ratio means is that they only need to improve profits by 30% over the remaining life of the company to justify the price. That's why this gets an attractive rating. Good company, cheap valuation. That's what the fundamentals say. I'm not always here to say that fundamentals should be 100% of your process, but it shouldn't be zero. And if you're going to rely on fundamentals at all, you know, you better make sure you've got the right fundamentals. Because if you, you've got a misguided sense of the fundamentals and you make an investment based on that, then you could be wildly off base in what you think. You're putting money into a company you think is really profitable, or you're trying to shoot short a company you think is unprofitable, and it turns out the opposite is the case. All right, we are running short on time, so I'm gonna have to move a little faster. Advanced Auto Parts. So we like another very similar company. It's been on our focus list. It's done extremely well. Same space. A tale of two stories. One of them, one of these stocks gets a good rating and has gotten a good rating. This one does not. Weak internal controls. I think this business has really dropped off here. Unfortunate. And then what happened today? I think they missed. And what happens when a company that doesn't have a good rating— what happens? It's down a lot. I mean, it's almost lost in the last couple days 20% of its market cap. Thanks so much, DL, for answering that question for Kelly. Yes, we did Hershey's yesterday, and there's a replay on our site. You can find all the replays, go to the blog. I think we got them all here in free training recaps. There's a link. All right, back to it. Sorry, we don't have that many time for questions. Profits are going to return on capital going to zero is not good. No PAT margins, probably. Yeah, like almost zero. And I bet we're going to see a fair amount of debt By the way, for all of our calculations, we always foot everything or tie everything back to the original accounting value so you can see all the adjustments we're making. We're super transparent. Why? Because we want you to trust us. We deserve your trust. How many other firms— name one firm, free subscription to Most Attractive Stocks— anybody who can name one firm who also shows you explicitly how they reconcile all of their adjusted calculations Back to accounting values. Another research firm that does that. You got to find another research firm that actually provides adjusted values anyway. That's a tough one. Most of them just use what Wall Street sends. Anyway, you get the idea. Here's what we're doing for the balance sheet, all the adjustments. And then here we are on the, on the adjustment side for the valuation side. There's nothing to reconcile to here because these are just adjustments you got to make to, to understand shareholder value. You can see $7.9 billion in debt. On $2.3 billion market cap. Credit rating bad. Yeah, that's a little bit scary. So yeah, they lost 20% of their market cap because they missed. All right, P-Labs, P-Lab, Photronics. So this is the AI stock that we think you should focus on. Why? Well, because it's in the space. It's not a fancy glamorous one. It's more pick and shovel play. By the way, we've done really well for our clients by identifying pick and shovel plays in the technology space in the past. Some super picks based on those. But this is a great one. I mean, look, it's cyclical business. Things have been going up and down, but you got a great, really cheap valuation. The valuation's implying a permanent 20% decline in profits. Market implied growth appreciation period less than 1 year. When we put on the focus list, it had an attractive rating. The business fell off a little bit, so we weren't exactly right about that. It came down. But look, it's not much of a decline. And by the way, the stock price is implying a much bigger decline. So we believe this is, this is the AI stock to be in. This is the one that's not a crowded trade. We don't believe in crowded trades. We believe the real money is made in skating to where the puck is going to be. And being in stocks before CNBC's talking about it, before Jim Cramer saying buy, buy, buy, before the Momo crowd gets in—that's how you make a real successful investing track record. It's not just trying to time the market. And trust me, when you're chasing crowded stocks, you're playing a market timing game because at some point the music stops, and when it stops, the stock's going to get crushed. So that's what we think about AI stocks. This is our top pick in the AI space going back to last year. We recommend this one over any of the other super crowded, overpriced AI stocks. All right, we're at our time limit today, so I'm not able to take any suggestions, but I appreciate everyone being here today. Uh, we are not investment advisors, so we're just here giving you great Research and insights on particular stocks. Trying to see if we got any double votes here. So I'm going to do one since everyone's been here for so long. We got Palmain Foods. That's looking pretty cheap. Got added to the most attractive stocks list here. Stock price implies a permanent 50% decline in profits. We think that's pretty good risk reward. So that's a good one. All right. We got one more of these this week. Join me tomorrow. If you registered today, then you're already on the list for tomorrow. You're all set. And again, I'm going to put the, the link in here for our Super Stock Bundle 2.0. Again, these are stock picks that we don't even have in a model portfolio, that we don't even have anywhere on our site, that are extremely rare in our system. And it was a backtest research project that we just did recently. We discovered Oh my gosh, these picks are unbelievable, and we're sending them in a— selling them in a special bundle. When you sign up, you get my top pick for 2025 right away, then you get 5 more picks within the next month. So those are going to be some of the best stocks to buy in the entire market, the best of the best, where economic earnings is greater than accounting earnings. Again, that happens very rarely. Great. So thanks everyone for being with me today, and I will see you tomorrow.