Finding Undervalued Gems in an All Time High Market

Summary

In this video, Adam Coup explains how to identify undervalued stocks even when the US market is at all-time highs. He emphasizes a bottom-up approach, analyzing individual companies rather than broad market trends, focusing on intrinsic value, growth, profitability, and a company’s competitive moat, or 'economic mode.' Using Stock Oracle, he demonstrates why PayPal, though undervalued, isn’t a long-term buy due to competition, while Copart (CPRT) is actively purchased for its strong fundamentals and high economic mode. The video combines fundamental and technical analysis to help investors make informed decisions and spot high-quality undervalued investment opportunities.

Takeaways

• 📈 Even when US markets are at all-time highs, there are always undervalued investment opportunities within individual companies.
• 💰 PE ratios alone are not enough to judge if a market or stock is expensive; they must be compared with earnings growth and profit margins.
• 🔍 Bottom-up analysis, focusing on individual companies, is more effective than top-down macro approaches.
• 📊 The S&P 500 valuation breakdown shows 31.9% highly overvalued, 13% overvalued, 31% fairly valued, and 23.8% undervalued stocks.
• 🏆 High-quality stocks are identified based on intrinsic value, predictability, profitability, growth, and economic moat (mode score).
• ❌ Cheap stocks are not always good; quality matters more than price when selecting undervalued stocks.
• 💳 PayPal example: undervalued but has a weak economic moat, making it unsuitable for long-term investment despite reasonable growth and profitability.
• 🚗 Copart example: undervalued with strong economic moat, consistent growth, high ROE/ROIC, no debt, and strong technical support, making it ideal for long-term investment.
• 🛠 Tools like Stock Oracle streamline analysis by calculating intrinsic value using multiple models and ranking stocks on key factors.
• 📉 Technical analysis patterns like bear traps and double bottoms can help identify ideal entry points for undervalued stocks.
• 💡 Investors should combine fundamental and technical analysis to make informed long-term investment decisions.
• 🔑 Economic moat, including barriers to entry, switching costs, network effects, and brand loyalty, is crucial in selecting durable investments.

Q & A

Why do some investors claim the market is overvalued?

Some investors claim the market is overvalued because they look at metrics like the price-to-earnings (PE) ratio, which is currently higher than historical averages. However, this alone does not account for earnings growth and profit margin improvements over time.

Why is PE ratio alone considered insufficient for evaluating stocks?

PE ratio alone is insufficient because it does not consider a company's earnings growth rate or profit margins. Companies today often grow faster and have higher profit margins than in the past, making direct historical comparisons misleading.

How does Adam Coup categorize the S&P 500 stocks based on valuation?

He categorizes them as: highly overvalued (20%+ above intrinsic value, 31.9%), overvalued (10–20% above intrinsic value, 13%), fairly valued (±10% of intrinsic value, 31%), undervalued (10–20% below intrinsic value), and highly undervalued (20%+ below intrinsic value, 23.8%).

What is the significance of a company's economic moat in Adam Coup's analysis?

The economic moat, measured by a mode score, indicates a company's competitive advantage and resilience to disruption. Adam prefers investing in companies with strong moats (scores 6–10) to ensure long-term sustainability and profitability.

Why did Adam Coup choose not to invest in PayPal despite it being undervalued?

PayPal is undervalued, but it has a weak economic moat (score 4/10) and faces high competition from Visa, Mastercard, and digital payment platforms, making it unsuitable for long-term investment despite solid financials.

What makes Copart an attractive investment according to the script?

Copart is undervalued with strong fundamentals: consistent revenue and cash flow growth, high return on equity and invested capital, no debt, and a strong economic moat (score 8/10). It also shows favorable technical patterns like support and double bottom formations.

How does Adam Coup use Stock Oracle and Oracle IQ in his investment decisions?

He uses Stock Oracle to calculate intrinsic value using multiple valuation methods and Oracle IQ to rank stocks on predictability, profitability, growth, financial strength, and valuation. This enables quick and comprehensive fundamental analysis.

What is the 'tennis ball' analogy mentioned in the script?

A 'tennis ball' stock is one that is likely to bounce back after a price drop, in contrast to a 'rock or egg' stock, which may never recover. This helps investors distinguish between temporary price dips and fundamentally weak companies.

How does technical analysis complement fundamental analysis in this video?

Technical analysis, such as identifying support levels and patterns like double bottoms or bear traps, helps determine optimal entry points for undervalued stocks, complementing the long-term perspective provided by fundamental analysis.

What investment philosophy does Adam Coup emphasize in this video?

He emphasizes investing in high-quality, undervalued companies rather than buying cheap stocks indiscriminately. Long-term investment decisions should be guided by strong fundamentals, a solid economic moat, and a combination of bottom-up analysis and technical indicators.

What role does financial consistency play in Adam Coup's evaluation?

Consistency in revenue, net income, and free cash flow is crucial. It indicates predictable performance, strong management, and lower risk, which are key criteria for selecting long-term investments.

Why is monitoring shares outstanding important according to the script?

Monitoring shares outstanding helps assess whether a company is buying back shares or issuing new ones. This affects return on equity (ROE) and shareholder value, as seen with Copart retaining capital which temporarily lowers ROE despite growing net income.