The News Is Following the Price — Four Contrarian Stocks: PayPal, Alibaba, Adobe, and Southwest

The illusion that 'news makes the price'

These four names share one thing: the price fell first, and the bad news followed.

PayPal is the clearest case. A few years ago, when the stock was high, every headline was good. Now every headline is bad — yet today's earnings and cash flow are actually higher than they were back then. It's the classic trap of judging a company by its stock price. I do the opposite: I judge the company, then ask whether the price is wrong. Let me walk through all four and compare them at the end.

PayPal — an 8x-earnings name Michael Burry just bought again

PayPal owns Venmo and Braintree and runs a merchant-services business moving hundreds of billions of dollars a year. Bottom line: it's a cash machine trading at 8x earnings and 7.5x free cash flow while buying back stock aggressively.

Free cash flow was $5.5 billion last year against a 5-year average of $5.2 billion. Returns on capital are actually improving — from 12.5% over five years to 14.67% over the last one — and net margin is 15% lately. Michael Burry recently added to it, saying the market has been 'attending PayPal's wake for years while the company buys back stock hand over fist.' A new CEO, Enrique Lores, just took the helm, and there are takeover rumors swirling.

My assumptions are conservative: revenue growth of 2/4/6%, FCF margins of 14/16/18%, a P/E and FCF multiple of 13/17/21, and a 9% return. At today's $44 that produces a low of $63–68, a high of $140–176, and a mid of $95–105 — roughly a 22.5% annualized return on the middle case.

Alibaba — the Amazon of China, down 50% from its highs

Alibaba is the 'Amazon of China,' serving 1.4 billion people across e-commerce, cloud, and payments. Bottom line: it ran from the $60s to nearly $190 on AI excitement, then pulled back about 50% from its October highs.

It's a monster that averaged $21 billion in free cash flow a year over five years, though that's dipped lately on AI capital spending — the same thing many big-tech names are doing, with the real question being whether the investment pays off later. There's drama this quarter, too. Alibaba is suing the U.S. Defense Department to get off the Pentagon blacklist, arguing it was branded a supporter of China's military with no real evidence, and Anthropic has accused Alibaba's Qwen lab of copying its models. Lots of noise.

Analysts see revenue doubling over the next seven years (about 10% a year). I plugged in half of that — revenue growth of 3/5/7% — with net margins of 12/15/18%, FCF margins of 15/18/21%, a P/E of 14/18/22, and a 9% return. At roughly $99 today, that gives a low of $110–138, a high of $300–350, and a mid of $186–220 — about a 21.5% annualized return.

Adobe — the company AI was supposed to kill just posted six straight record quarters

Adobe makes Photoshop and Premiere. Bottom line: fear that 'AI will kill Adobe' knocked the stock down 44% this year, even as revenue keeps setting record highs — six quarters in a row.

The switching cost is enormous: once you build your workflow around Adobe, you keep paying the monthly subscription for years. Ironically, both Anthropic and OpenAI have deals with Adobe's software. Adobe isn't losing to AI — it's building AI into its tools, and it even bought Topaz Labs, the very tool bears thought would eat its lunch. Last quarter revenue rose 13% to a record, and the company raised guidance.

The numbers are top-tier: an $85 billion cap, $10.3 billion of free cash flow last year, 8x FCF, a 5-year return on capital of 26% (36% lately), and a gross margin near 90%. One decisive tell — an Adobe board member who is also the CEO of Eli Lilly bought nearly $2 million of stock with his own money. Michael Burry holds it too, calling it a clear mispricing. This is a multiple problem, not a business problem.

My assumptions: revenue growth of 3/6/9%, FCF margins of 37/40/43%, net margins of 26/29/32%, a P/E of 18/21/24, and a 9% return. At today's $211 that gives a low near $400, a high of $890, and a mid of $600 — about a 25% annualized return, the highest of these four.

Southwest — a 48-year profit streak and a margin recovery

Even Buffett calls airlines a tough business. But Southwest has always been different. Bottom line: from start to finish, this is a single story about margin recovery.

Before COVID, Southwest ran 10–15% net margins like clockwork and was profitable for 48 straight years — almost unheard of in an industry where rivals go bankrupt constantly. Its 10-year average net margin has slipped to 4.5% (2.4% over the last five years), but the recovery signs are showing. Barclays raised its target to $65, with Citi and Evercore bumping theirs up too. And in a fun one, its first flight with Starlink Wi-Fi just took off, giving passengers fast internet gate to gate.

I didn't assume any fancy growth — just a return to normal profitability. Revenue growth of 3/5/7%, net margins of 8/11/14% (below the 15% they've hit before), a P/E of 16/19/22, and a 9% return. At today's $51 that gives a low of $73, a high of $213, and a mid of $130 — about a 23.5% annualized return.

Side by side

Stock	Price	Valuation	Key catalyst	Mid-case return (annualized)
PayPal	$44	8x earnings, 7.5x FCF	Burry buying, new CEO, takeover chatter	~22.5%
Alibaba	~$99	$21B annual FCF (5-yr)	Down 50%, AI capex payoff	~21.5%
Adobe	$211	8x FCF, 26% ROIC	Six straight record-revenue quarters	~25%
Southwest	$51	4.5% 10-yr net margin	Margin recovery, target hikes	~23.5%

The takeaway: I didn't stretch a single assumption

All four clear a 20%+ expected return even on assumptions set at roughly half of what analysts expect.

Here's the key. I didn't plug in the everything-must-go-perfectly math that a Nvidia or a Micron requires. I just need these businesses to keep running naturally. My goal isn't to be right on any single name — it's to be right on the basket as a whole. And yes, I'm still losing overall — I laid out why a 34-point gap doesn't bother me separately.

FAQ

Q: The news is this bad — is now really the time to buy?

A: I'm not saying 'buy now.' But you have to separate whether bad news created the price drop, or whether the price dropped and the news followed. PayPal's earnings and cash flow are actually higher than at its peak, yet every headline is negative. That gap can be the opportunity.

Q: How do you view Alibaba's Pentagon-blacklist and lawsuit risk?

A: It's a real geopolitical risk. That's exactly why I assumed just 5% revenue growth — half of the 10% analysts expect — and used conservative valuation multiples. The point is that even after those haircuts, the expected return still clears 20%. I didn't ignore the risk; I priced it in.

Q: If Adobe's expected return is the highest at 25%, why is it still cheap?

A: Because of the narrative that 'AI will replace creative software.' But revenue just set records six quarters running, a board member bought with his own money, and Anthropic and OpenAI actually partnered with Adobe. That's why I see a multiple problem, not a business problem.