3 Shocking Facts Smart & Safe Investors Need To Know

Before we begin, a personal note. The past two weeks have brought both a painful personal loss and a brutal financial hit to my family. While I won't dwell on the details, I ask for your patience if this article carries a slightly more somber tone than usual. That said, this update is important. The team and I are still fully committed. We've been working late into the night calibrating the safety, quality, and valuation models so I can resume screening articles and bring paying members the best Blue Chip bargains on Wall Street (We are also very close to automating Zeus). While we're still finalizing that system, I wanted to take a moment to share a concise market update, covering key developments in the economy, valuation context, and the AI boom. Part 2 of this major update is coming on Thursday. The team is confident that all calibrations for the safety, quality, and valuation models will be complete on Friday, so that is the current plan for the first screening article (The highest-quality Buffett-style bargains you can buy today). 2 Shocking Facts All Investors Need To Know: The Stock Market Could Be “Bear Market Low” Undervalued Market PEGY Updates (S&P & Nasdaq) Source: Ycharts The past year has been an incredible run for the stock market, with tech stocks once more leading the way. And of course, that’s been true since the bull market began (around the same time ChatGPT came out and the AI Boom started). Source: Ycharts So is the market in a bubble? Let’s see what the PEGY analysis shows. The historical earnings growth rate is 6.5% (free cash flow 5.5%), and the Nasdaq’s is around 10% Today, free cash flow is growing at almost 17% which explains why the current 17X EV/EBITDA is NOT a bubble, because the PEGY ratio is 0.96. Which means that if earnings grow as expected, there is no mathematical way that the market isn’t at least fair value (Peter Lynch’s growth at a reasonable price). In fact, Morningstar’s analysts, using discounted cash flow models (that include best estimates for growth), show the Nasdaq at a 6% discount with a fair value forward PE of 28 vs today’s 26. That means that if you believe Morningstar’s tech analysts, the Nasdaq has 23% to 24% upside potential justified by fundamentals (NOT A FORECAST, just what would be justified by fundamentals, so if it happens, don’t be surprised), and if you look at PEGY, its actually 47%. OK, what about the S&P? Source: FactSet, Morningstar The S&P’s free cash flow growth rate is expected to be double what it was from 2011 through 2024, and that explains why the market is 22% historically undervalued when adjusted for net cash. That’s why, if earnings grow as expected (14% next year), Morningstar estimates the S&P has 17% to 18% upside potential, and the Nasdaq 24% due to 17% growth. The PEGY analysis shows the market so undervalued, 22%, that we’re literally at the 20% to 25% historical discounts of bear market bottoms. In April 2025 and October 2022, the S&P hit a 20% historical discount at the bottom of the market. We’re at a 22% discount right now. Source: Ycharts I know you might be thinking, “Are you high! Market has doubled in 3 years and is near record highs, and you’re saying stocks are 22% undervalued!?” I’m NOT predicting stocks go up 43% in the next year. I am saying that IF AND ONLY IF today’s expected growth is achieved and in 12 months the growth outlook is unchanged, then a 43% gain is 100% justified and explainable. Growth giants like the Mag 7 keep beating expectations that keep rising. The bar is high, rising, and they keep clearing it. That’s an objective fact, and if the growth that’s currently expected continues? Then the stock market, mathematically speaking, at a PEGY of about 1, simply can’t be in a bubble (and Morningstar agrees by the way, with hundreds of analysts and hundreds of models saying a modest discount to fair value). April 8th, 2025 (market bo