3 Undervalued Stocks the Market Is Sleeping On – But I’m Not!

If there is one thing history has taught us, it is that patient investors get rewarded. Right now, I believe the market is completely sleeping on three undervalued stocks, but I am not. These companies have serious multibagger potential, and I have been putting my money where my mouth is.

Let’s dive in.

Stock #1: Adobe (ADBE)

I recently started buying Adobe, and I keep hearing the same thing:

"Adobe is going to be completely eliminated by AI."

People are acting like Adobe is headed to zero because of artificial intelligence. Maybe that is possible. But you know what else is possible? That I wake up tomorrow and find out I am Warren Buffett’s long-lost son, set to inherit billions of dollars. It is possible—but is it probable?

That is what investing is about: probability.

What Makes Adobe a Strong Investment?

• $7.9 billion in cash flow last year
• $6.9 billion in average cash flow over the past five years
• Gross margin of 89 percent, meaning nearly 90 cents of every extra dollar in revenue goes straight to overhead, taxes, and profits
• Net profit margin of 30 percent
• Strong balance sheet with only $8 billion in debt
• Return on invested capital (ROIC) of 30 percent last year and 22 percent over the past five years

If a company with these numbers is going to zero, I would be shocked.

Adobe’s Eight Pillars Analysis

• Strong cash flow
• High margins
• Great balance sheet
• Strong ROIC
• Five-year PE ratio is high
• Five-year price-to-free-cash-flow is high

Just because a stock has a couple of red flags does not mean it is overvalued. If Adobe sustains 30 percent annual growth for 20 years, today’s price might look like a bargain.

AI Will Not Kill Adobe—It Will Make It Stronger

Adobe is not being disrupted by AI. Instead, it is integrating AI into Photoshop, Premiere Pro, and Creative Cloud to revolutionize workflows. AI is not a threat—it is an opportunity.

The company has also expanded its workforce to nearly 30,000 employees, reinforcing its commitment to innovation.

What Do Analysts Think?

• $21 per share in earnings this year, expected to grow to $35 per share in four years
• Revenue growth of 11 percent per year on average

This is strong double-digit growth that should keep investors excited.

Stock Analyzer Tool: What’s Adobe Worth?

Using conservative assumptions:

• Revenue growth of 6, 8, and 10 percent
• Profit margins of 26, 29, and 32 percent
• Price-to-earnings (P/E) ratios of 18, 21, and 24
• Discount rate of 9 percent

At a current stock price of $431:

• Discounted cash flow valuation estimates a low value of $400
• Middle valuation of $539
• High valuation of $730

If my assumptions are correct, buying at today’s price should yield around 12 percent annual returns, which is attractive.

Stock #2: Southwest Airlines (LUV)

Southwest Airlines is another stock I own. The reason is simple:

• The stock has been beaten up significantly
• It has record-breaking revenue but temporary low profitability

Southwest used to consistently deliver 10 to 15 percent profit margins before the pandemic. Right now, its five-year profit margin is negative, but I believe it will revert to historical levels.

The Numbers Tell the Story

• Revenue of $2.44 billion, the highest in company history
• If they return to 12 percent margins, that translates to $3 billion in profits
• Market capitalization is only $18 billion, which is cheap for an airline of this caliber

Yes, the current numbers look bad, but that is exactly why I am interested.

Big Changes Coming in 2025

Southwest is not standing still. The company is making significant strategic changes, including:

• Rolling out assigned and premium seating, a major shift for the airline
• Expanding into vacation packages
• International expansion through a partnership with Iceland Air
• Major leadership overhaul, with six directors stepping down

Stock Analyzer Tool: What’s Southwest Worth?

At a current stock price of $30:

• Discounted cash flow valuation estimates a low value of $32
• Middle valuation of $66
• High valuation of $115

If Southwest returns to profitability, this stock could easily double or triple from here.

Stock #3: Nike (NKE)

Nike is another classic case of market overreaction. When Nike was at $180, I said I was interested below $100. Many people told me, "No chance." Well, guess what? Nike hit $70 per share.

The Fundamentals Are Still Strong

• $49 billion in revenue
• $5.5 billion in free cash flow last year
• Five-year free cash flow of $4.75 billion
• Growing return on invested capital (ROIC)

Nike is not dead. The company still has the LeBron and Jordan brands, and both shoe lines are continuing to grow.

New CEO, New Strategy

• Elliot Hill is refocusing the company on product innovation and athletes
• Sustainability initiatives aim for a 70 percent emissions reduction by 2025
• The brand’s value is now $33 billion and growing
• Nike has maintained a 23-year streak of increasing dividends

Stock Analyzer Tool: What’s Nike Worth?

At a current stock price of $74:

• Discounted cash flow valuation estimates a low value of $60
• Middle valuation of $84
• High valuation of $118

Final Thoughts

These are three incredible companies that the market is undervaluing right now. Will they all succeed? No one can say for sure. However, based on strong financials and long-term trends, each of these stocks has a strong probability of future growth.

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