I hope you had a great long weekend. The Wednesday delivery of our newsletter is primarily due to the holidays. Normally, I would deliver our newsletter on a long weekend on the Tuesday, but because it was Canada Day, I pushed it back an additional day.
For the last few weeks, I’ve been discussing the best and worst-performing Canadian Foundational stocks. This week, I will focus my efforts on going over some of the poorer-performing US Foundational Stocks.
In terms of portfolio moves, I didn’t make any this week as I am currently allocating a lot of capital toward developing the basement in my home. Because I am unsure of the total costs of the project, I have not been deploying my cash position as fast as I normally would.
However, I’m not overly upset about this, as my portfolio broke new all-time highs this week, as the market looks to be shrugging off a lot of the geopolitical conflicts and tariff worries. It just goes to show how impossible it is to predict the short-term movements of the market and how a long-term mentality is the only way to succeed.
Let’s get right into it.
US Foundational Stock Overview
After a couple of years of solid performance relative to the S&P 500, the US Foundational Stocks are struggling in 2025. However, the underperformance is primarily related to one individual equity, that being UnitedHealth.
Although a single drop like that in a portfolio of 20-30 individual equities is unlikely to have a material impact on a portfolio, there are only 10 Foundational Stocks, so UnitedHealth’s 40%~ drawdown in 2025 is currently impacting the results of the overall US Foundational Stock returns by nearly 4%.
There is still lots of time left in 2025 for the US Foundational portfolio to rebound, but let’s dig into some of the weaker performers on the year.
UnitedHealth Group (UNH)
If you look to the chart above, it went from great to ugly for UnitedHealth. At one point, the company was up nearly 25% on the year. However, some bad PR and some consistent downgrades in guidance caused a large-scale drawdown of the company.
The real issue behind the company at this point in time is a surge in older American’s utilizing more healthcare than expected. This is causing claims volume to accelerate, which is ultimately pushing margins down. In addition to this, Medicare is not covering all of the costs of the claims, which is pushing margins even further.
There was also the added issue that the Department of Justice was investigating UnitedHealth for potentially fraudulent transactions in its Medicare segment. Essentially, UnitedHealth was charging added coverage and upscaling diagnoses to get higher payments from the government.
This has not been proven, but even accusations can be enough to damage a company’s reputation and stock price.
I mulled long and hard over removing UnitedHealth as a Foundational Stock. However, I decided to keep the company on the list for a few reasons.
For one, UnitedHealth has a history of “unusual” cost spikes during prior healthcare reforms that it navigated successfully. Secondly, demographic tailwinds remain a longer-term plus. As the population gets older, Medicare Advantage enrollment is projected to rise, and UnitedHealth is the market leader in that space.
And finally, the company is relatively diversified. While it does have large exposure to healthcare insurance, it also has its Optum health services, which provide care, pharmacy, and data analytics.
Overall, I think the road might be long here to recovery. But I think the company is cheap enough now it is a solid contrarian situation. Trading at only 11.5x free cash flow, the company is trading at a whopping 42% discount to historical averages. See the chart below:
Historically, when UNH has gotten this cheap relative to historical averages, it has gone on a run price-wise. See the chart below:
Every situation is unique, but if UNH manages to sort out its billing issues and get back on track, the company is cheap here.
Home Depot (HD)
Home Depot is one of the largest holdings inside my portfolio, and it has been one I have been very patient with. Although I started accumulating this company with the idea that interest rates would be much lower than they currently are in the United States, my thesis for the long term remains well intact, and as such, it continues to be one of my biggest holdings and one I will continue to add to.
Home Depot has a significant market share in the overall home improvement segment in North America. With most renovation projects being financed due to demanding cash outlays, when interest rates are higher, consumers tend to tighten up on these types of projects.
However, on the flip side, with the average home in the United States being more than 40 years old, this also creates a considerable long-term tailwind for when interest rates come down. In fact, Home Depot has stated it figures there are tens of billions of dollars in deferred home improvement spending due to the current rate environment.
Below is a chart of the company’s total transactions (orange bar) and average ticket (blue line):
We can see around the time interest rates started accelerating, transactions dropped, and people started spending less per visit (average ticket). However, I don’t think this will be permanent.
The company’s balance sheet is solid enough to weather practically any economic slowdown, and despite consumers tightening up materially, the company still generates in excess of $15B in annual free cash flows. The dividend is well covered and growing, and all of the underlying numbers point to it being one of the better blue-chip stocks in the United States that is simply being held back by an environment it has no control over.
I’m still bullish on Home Depot and will continue to add. I believe it is a matter of when, not if, renovation activity picks up south of the border, which should ultimately fuel results.
Amazon (AMZN)
It is funny to see Amazon on the worst-performing Foundational Stocks review, as it is really only trailing the index by 3-4%, which can be erased in a matter of a day or two. However, its retail exposure has left it lagging many of the other Magnificent 7 peers.
Although I believe in a relatively efficient market, I do believe there are discrepancies occasionally, and I think the market is wrong about Amazon at this point in time. Members will know this, as it was a former Value Call here at Stocktrades Premium.
Don’t mistake Amazon’s weak share performance for weak results. In fact, the company has been killing it over the last while. However, investors aren’t really focused on that and are more so focused on what’s to come.
The threat of a return to high inflation and stickier interest rates at higher levels have made consumers more cautious, and Amazon’s e-commerce growth, while still strong, has slowed from the pandemic surges in spending. There is fear that discretionary spending could pull back if the U.S. economy softens.
However, and I’ve mentioned this quite a few times in my discussions of the company, Amazon’s retail business is not really why I own the company. Sure, it’s nice to have one of the largest retail businesses on the planet with a distribution network that simply cannot be matched, but the real promise here is in its higher-growth verticals like AWS and Advertising.
Look at the chart below – 22.8% compound annual growth rate on AWS revenue and a 16.6% CAGR on advertising. If Amazon Web Services continues to grow at this pace, there is a likelihood it will overtake the company’s retail revenue in the next decade.
These are much higher-margin, less capital-intensive, and profitable segments.
Then we get to valuations. The company has been trading at a discount to its typical price-to-operating cash flow ratio since the start of 2023, when rates increased, inflation was high, and consumers started to roll back spending.
However, AWS and Advertising continue to make up a higher percentage of overall revenue, and it is likely the retail arm of the business rebounds on falling rates and increased consumer spending. These should be added tailwinds for the company overall.
Pepsi (PEP)
I will admit, Pepsi has been a frustrating one. The initial thesis behind the company being an addition to the US Foundational List was the fact it was more diversified than a company like Coca Cola. Instead of focusing primarily on beverages, the company offered a wide variety of snacks, etc.
Unfortunately, those snacks are exactly what is causing a drag on the business. After steady increases for quite some time, if you look to the chart below, it has been on a downward slide:
Where it gets even worse is the company’s operating income. It has declined in pretty much every segment:
Pepsi was a company that was hit relatively hard by high food inflation. Junk foods were already pricey enough prior to the rapid inflationary period, and now they’re even more expensive.
As a result, it has been able to raise prices, but not enough to offset the impacts to margins.
This has resulted in multiple headwinds. For one, consumers simply are not buying the junk foods they used to because of health concerns and the fact that these are discretionary items. If you’re in a pinch financially, it is fairly easy to cut out the bags of Doritos you’re buying. On the soft drink side of things, it has been more stable but still relatively flat.
The main attractiveness when it comes to Pepsi right now is valuations, especially as a contrarian play. If inflation continues at normalized levels, it is likely consumers start to accept higher prices for these consumables and will begin to pay again, especially if interest rates come down.
At only 16.5x expected earnings, the company is cheap. Much cheaper than it has been over the last decade. The company is approaching a 6% earnings yield, which is the cheapest it has been in over 7 years.
I wouldn’t necessarily say the thesis for Pepsi as a Foundational Stock is broken, but it is certainly one I am continuing to monitor. Out of all the Foundational Stocks, it is probably the only one I am not fully confident in a rebound. But, if it does rebound, there is no doubt buying today is at an attractive price. But, I do believe the market is pricing in some long-term headwinds for the company in terms of the hits to margins and a decline in the overall attractiveness of junk foods.
My overall thoughts on the weaker performers
Pepsi and UnitedHealth have been the main drags on the US Foundational Stocks in 2025. One company (United) I am fairly confident will get back to its previous form after sorting out some billing issues. I’m basing this on the fact they have done it numerous times in the past, and the company is known to have large drawdowns like this during periods of escalating claims hitting margins.
Pepsi, on the other hand, I am less confident in. However, I do acknowledge the fact that the company does provide some pretty large value here if it can turn its operations around and consumers start purchasing discretionary food items in light of the falling interest rates we will probably see in the US by the end of this year or in early 2026.
For Amazon and Home Depot, I’m a patient accumulator of shares at these price levels and will be for many years. These are two high-quality companies that I don’t even mind trading flat over the short to mid-term. Yes, the thesis for Home Depot is taking a little longer than expected, but it is still very much intact.
This is why it is so important to develop a thesis and stick to it. I could have easily sold Home Depot in frustration over a lack of short-term share results. However, a clear end goal in mind allows me to have confidence in continuing to add to my overall share count and reap the benefits later on.
