Value Pick of the Week

No Pick of the Week this week. Western Digital (WDC) came very close to being recommended for the second time — I think the company has a solid future, and it also has a recent track record of “beat and drop,” where the earnings report is stellar but the price falls anyway. If you didn’t buy it in June when it was first recommended, it’s on sale right now at 35% off.

Market Summary

The S&P 500 rose ~1.5% from Monday through Wednesday, then fell ~2.1% on Thursday and Friday after the big tech companies reported earnings. Big tech was punished on cash flow, not demand.

  • 📉 Alphabet (GOOG): the cause was spending running ahead of cash. Capital spending (capex) was $51.4 billion, and free cash flow (FCF) was negative $9.1 billion by Alphabet’s own measure — the second straight quarter below zero. The stock closed 12.6% lower, its worst day ever.
  • 📉 Amazon (AMZN): it kept its 2026 capex forecast unchanged but reported negative FCF, the same metric that sank Alphabet a day earlier. EPS also missed. The stock was 7.14% lower before the open and recovered to close at $240.35, down 1.41%.
  • 📉 Microsoft (MSFT): roughly flat. Its operating cash covered its capex, but its lower capex commitment hit the AI cloud providers.
  • 📉 Intel (INTC), −28.58% on Friday — its worst day since 1974, and a separate problem from the AI spending story. Its Q4 revenue forecast of $15.0B–$16.0B came in against consensus of about $17.1B, and the CFO said PC weakness will last at least through the first half of next year.
  • The Fed’s hold sounded hawkish but barely moved stocks. The Federal Reserve kept the federal funds target range at 3.75%–4.00% on Wednesday after a 10-2 vote.
  • Monday’s 0.7% gain came from AI sentiment. A revival of the AI trade fueled gains as Anthropic PBC filed for an IPO.
  • The weekly decline was concentrated in a handful of mega-cap companies — most of the S&P 500’s constituents rose.

How Our Picks Fared

Our past picks beat the S&P 500 by 0.3%. Our scorecard functions like an equal-weight index, so when mega-cap companies fall they affect the S&P index more strongly than they do our scorecard, which treats all picks as equals regardless of market capitalization.

We had two companies that moved by more than 10% on the same day, and in opposite directions.

📉 Alphabet (GOOG) fell 12.3%

  • As mentioned above, EPS was $2.12 against $3.02 expected (−29.8%). 18.2% of the miss was due to a writedown against earnings on Alphabet’s sizeable stake in SpaceX (SPCX), which fell during Q3.
  • Free cash flow was −$9.1B, the second straight quarter below zero.
  • The 2026 capex guide was unchanged, and management expects spending to rise significantly in 2027.
  • Search ad growth slowed to 12% from 17% the prior quarter. Management blamed currency moves.
  • Google Cloud revenue rose 103% to $30.7B, which management credited mainly to AI infrastructure.

📈 Textron (TXT) rose 11.5%

  • Textron reported earnings Thursday morning and bounced 11.7% for the day.
  • The report highlighted beats on earnings and cash, with revenue in line:
    • Adjusted EPS beat by ~23%.
    • FCF was an impressive $410M, up 51% year over year and about 1.5x net income.
    • Revenue of ~$3.8B was in line, up ~4%.
  • Guidance rose on both adjusted EPS and manufacturing cash flow, the latter up $100 million.
  • One risk is still open: the award of the next production phase of the Army’s MV-75 helicopter program is delayed. Textron expects a $60–110M charge when it comes, and that charge is still left out of guidance.

Past Picks Review — Aerospace & Defense, Part Two

General Dynamics (GD) and Textron (TXT)

Both companies reported this week. Both beat. Both raised or reaffirmed, and both rallied hard — Textron up 12.9% and General Dynamics up 8.2% since mid-month — and both still fall short of the bar.

General Dynamics (GD) — SELL ($372.59)

Recommended February 5, 2023 at $229.22, GD is up 62.5% against the index’s 83.2% — behind by 20.8 points.

  • The $415 median 1-year target implies 11.4% upside; with the 1.72% dividend that’s 13.1% total against a 24.5% benchmark target — short by 11.3 points. Clearing it requires a $457 median, and no active target reaches that.
  • The strongest argument against this call is a record total backlog of $220.3 billion, on $98.8 billion of orders in a single quarter. Estimated total contract value including potential awards reaches $270.7 billion — roughly five years of revenue already booked.
  • But the quarter’s profitability was uneven. Revenue rose 12.9% to $14.6 billion and diluted EPS 15.7% to $4.49, with overall operating margin up just 20 basis points to 10.5%. Underneath that, Combat Systems operating earnings fell 1.5% with margin down to 13.8% from 14.9%, and Technologies margin slipped to 9.4% from 9.8%. Only Aerospace (14.5% from 13.3%) and Marine Systems (7.9% from 7.1%) improved.
  • Quarterly FCF fell 35%, to $1.23 billion from $1.90 billion, though the nine-month figure of $4.83 billion is well ahead of last year’s $3.01 billion.
  • The valuation doesn’t support the growth rate. At 20.0x forward earnings against 13.6% expected EPS growth, the PEG sits at 2.28 — expensive for a defense prime whose margin expansion is confined to half its segments.
  • There’s a leadership change in progress. Phebe Novakovic is moving to Executive Chairman after fourteen years, with a successor elected in early October. A CEO transition at the top of a $220 billion backlog is a material change — and it arrives with no formal guidance issued in the release.

Textron (TXT) — SELL ($85.70)

Recommended January 29, 2023 at $72.28, TXT is up 18.6% against the index’s 86.2% — behind by 67.7 points, the worst relative performance of anything in this autumn’s review.

  • The gap is narrower but real. The $100 median implies 16.7% upside; the dividend adds almost nothing at 0.09%, leaving 16.8% against a 24.5% bar — short by 7.7 points. A $107 median would clear it, so this is the one where a post-earnings refresh could plausibly change the answer.
  • The beat was on earnings, not on growth. Revenue rose just 4% to $3.751 billion. Adjusted EPS of $1.76 was up 14% from $1.55, and GAAP EPS $1.56 from $1.31 — good numbers delivered on a nearly flat top line.
  • The largest segment is converting revenue to profit poorly. Textron Aviation grew revenue 14% to $1.680 billion but segment profit only 4%, to $179 million from $172 million. Jet deliveries rose to 51 from 42 while turboprops fell to 32 from 39.
  • Bell went backwards. Revenue fell 9% to $933 million and segment profit fell 17% to $76 million, on lower MV-75 military volume. Commercial helicopter deliveries slipped to 29 from 30.
  • The guidance raise rests on a procedural event, not demand. Management attributed the increase — adjusted EPS to $6.55–6.65 and manufacturing cash flow to $800–900 million — to Congressional approval of the Army’s Above Threshold Reprogramming request for the MV-75 Cheyenne program and the related contract modifications. That’s funding timing being unblocked, which is real money but not the same as new orders.

What would make these wrong. General Dynamics has nearly $100 billion of orders booked in three months; if that backlog converts faster or at better margin than modeled, every current target is too low and the stock has been mispriced by the entire analyst base. Textron is cheap, growing earnings fast off a low base, and has three analysts parked at $86 who look increasingly stranded — the refresh risk on this one runs in the holder’s favor.

Bottom line. Four years and two years respectively, and neither has kept pace with a benchmark we can buy for nothing. Both delivered good quarters this week and both were rewarded for them, which is the right moment to leave rather than the wrong one. General Dynamics is the firmer call — the arithmetic says no plausible target revision closes an eleven-point gap. Textron is the closer one, held back by a 4% top line, a shrinking Bell, and a guidance raise that came from a funding approval rather than from demand. Sell both.

No Past Picks Review next week — there are 14 of our past picks releasing earnings this week — it’s going to be a busy week.

Have a great week!

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