It is strange how investors often find reasons not to buy. When markets fall, the fear is that things will get worse. When markets rise, the fear is that it cannot last.
I do not spend much time attempting to predict macro trends. I do not find the exercise particularly useful. What I want is awareness. Awareness of the risks that can affect companies relative to their quality and valuation. More importantly, I want to find opportunities when markets become distracted.
While the indexes continue their march higher, led by a few AI-related names, the broad market has been volatile. Earnings season has been strong overall, rewarding companies that delivered and punishing those that disappointed.
This volatility is a gift to patient investors. It has forced a reset in expectations for several high-quality businesses, creating entry points that have not existed in months.
Below are three quality compounders that have pulled back meaningfully despite strong fundamentals. These companies possess wide moats, durable margins, and visible reinvestment runways. And right now, they are offering more reasonable entry points.
Waste Management (WM)
I keep coming back to Waste Management. I covered WM in detail in earlier write-ups—Waste Management Stock: A Stable Compounder at a Premium Valuation and 5 Quality Compounder Stocks to Watch For The Next Pullbacks—where I took a cautious view on valuation. Well, the pullback arrived.
WM is down over 20% from the highs it reached in June. Shares now trade near $200 and at roughly 14x EBITDA and about 26x earnings. The company delivered a strong quarter, so it is fair to ask why the stock pulled back.
Why the Stock Pulled Back
The simple answer is valuation. The stock was priced for perfection at $240. When a company trades at a premium multiple, things need to go right. A rerating made sense on valuation alone as I have warned, but the quarter also brought two issues that gave investors something to question: Recycling prices fell sharply, and the Stericycle acquisition came with higher than expected integration costs.
The Long-Term Thesis Still Holds
But the thesis has not changed. The stock is simply a little cheaper today and some of the long-term growth levers have more visibility.
Going forward, these levers include:
- Pricing power backed by scarce landfill assets.
- Margin expansion from route density and operational efficiency.
- High-return projects in renewable natural gas and recycling automation.
- Stericycle synergies that should add roughly $300 million in EBITDA by 2027.
- Management’s goal to reduce leverage to 2.5x-3x EBITDA that can lift ROIC toward the high teens.
Together, these support a reasonable trajectory for free cash flow to grow 8 to 10% through 2030.
What This Means for Investors
If WM continues on this path, the stock looks reasonably priced around current levels. The 8-10% free cash flow growth is realistic given the durability of the moat and all weather nature of the business. Management has a knack for consistently executing and the pieces are in place for compounding to continue. The pullback has brought the valuation back to a point where long-term investors have a reasonable entry point or can begin to add to their current position. Additional pullbacks below $200 per share will only improve the margin of safety.
Microsoft (MSFT)
Microsoft’s stock has drifted lower from its recent highs, bringing it back to levels seen in June. The pullback has effectively taken some of the froth off of the valuation and created a more reasonable entry point for a company with one of the strongest long-term stories in the market.
Why the Stock Pulled Back
The pullback has come down to two concerns that followed what I thought was a very strong quarter.
- Higher AI infrastructure spending that puts pressure on near-term free cash flow.
- Some margin erosion as Microsoft builds capacity ahead of demand.
This is another case where a stock that has performed well is taking a healthy breather. But nothing from the quarter changes the long-term thesis.
The Long-Term Story Remains Clear
Microsoft remains a quality compounder that controls the most important layers of the modern enterprise stack. The thesis is supported by three core forces.
- Azure is indispensable cloud infrastructure and will support AI workloads. And with remaining performance obligation (RPO) of $392 billion dollars, there is strong visibility for demand.
- AI monetization is emerging across the portfolio. Microsoft is capturing the value of AI at every layer of its business, driving ARPU higher.
- Microsoft’s financial model is built for reinvestment. It produces recurring, high-margin cash flows that allow the company to fund massive capital spending while still compounding value.
This is a company benefiting from tremendous scale, pricing power, and a network effects. It is one of the few businesses on earth capable of sustaining 30% returns on invested capital (ROIC) even while pouring billions into infrastructure. That level of profitability gives the company room to absorb near-term margin pressure and still compound value over time. And as the investment phase of the AI build out matures, this should support margin expansion, and puts Microsoft in a position to capture a significant share of AI revenue and productivity gains.
What This Means for Investors
Microsoft remains one of the clearest compounders to own. Pullbacks like these are creating an opportunity for investors. Even after the run it has had, Microsoft likely deserves its current multiple. Based on my model, the market is pricing in several years of elevated capital spending, margin compression, and revenue growth that is below trend.
The point being that this tells me that the market is not pricing Microsoft for perfection. It is pricing a business that can grow free cash flow steadily in the back half of the decade once the investment cycle normalizes. There is also a fear of an AI bubble bursting, but it is also worth noting that if the pace of AI spending slows or moderates, Microsoft’s stock likely benefits as the narrative shifts away from fears of a bubble and toward improved free cash flow.
S&P Global (SPGI)
S&P Global’s stock has spent most of the last year consolidating around $500 per share. Over the summer, the stock made new highs reaching $560 per share before giving back nearly 20%, settling in the high $400s. That move reset a stretched valuation and created an opening to buy one of the cleanest asset light compounders at less than 25x forward earnings.
Why the Stock Had Pulled Back
The initial pressure came in September after FactSet reported a messy update. The report raised questions about demand for market data and spending trends across financial services. Even though S&P’s business mix is very different, the read-through created uncertainty in a company trading above 30x earnings at the time.
From there, a few other concerns added to the hesitation.
- Some investors questioned whether the surge in bond issuance that boosted Ratings would prove temporary.
- Planned divestitures in Market Intelligence created uncertainty about what the segment would look like going forward.
- Sanctions related headwinds affected the Commodity Insights narrative.
The important takeaway from these concerns is that none were signs of deterioration in the core business. They simply weighed on sentiment at a time when the stock had run ahead of fundamentals. Q3 results were, by all standards, a strong quarter that calmed investor fears.
The Long-Term Story Remains Clear
S&P is an asset-light, quality compounder that owns the data, benchmarks, and ratings infrastructure that global markets run on. The IHS Markit merger appears to be paying off by expanding S&P’s data estate, and supporting margin expansion as synergies come together. These traits support a business that can grow free cash flow at a high single digit pace and return meaningful capital to shareholders.
These expectations are supported by several growth drivers.
- AI is improving internal productivity and creating new external products that deepen customer workflows.
- Private markets continue to scale, and the planned With Intelligence acquisition builds on this opportunity.
- ESG and energy transition data are seeing steady, long-term demand.
- The core franchises in Ratings and Indices continue to provide reliable pricing power and recurring revenue.
This is a company with a history of consistency, and a runway for continued expansion.
What This Means for Investors
At 25x, you are getting one of the highest quality businesses in the market at a reasonable price. Modeling conservative assumptions of mid single digit revenue growth, and flat margins suggest the stock is fairly valued at today’s levels. More likely, the company experiences faster revenue growth as well as margin expansion suggesting the company has room for upside. In either case, I view the drop to the $400s as a gift for a stock that rarely goes on sale.
Final Thoughts
Pullbacks in quality names tend to look uncomfortable in the moment but useful in hindsight. What matters is whether the long-term thesis is intact, and in each of these cases, it is. Waste Management, Microsoft, and S&P Global continue to grow, continue to reinvest, and continue to strengthen their competitive positions.
Now, I did not detail every risk for each company here, but they all have them. Such is the nature of investing. The value comes from being patient enough to wait for moments when at least some of those risks are reflected in the price. The pullbacks these names have experienced do not guarantee perfect entry points, but they do reduce the optimism baked into the multiple.
Therefore, expectations have become more reasonable, and the businesses continue to execute. That combination creates opportunity. For long-term investors who value consistency, predictability, and strong returns on invested capital, these remain compelling places to build positions over time.
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Want more? Check out other articles
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- Waste Management Stock: A Stable Compounder at a Premium Valuation
- S&P Global vs. Moody’s: Better Investment in 2025?
- 5 Quality Compounder Stocks to Watch for the Next Pullback
