To The Moon

Oversold Stocks: Bargains or Traps? 📉💡

Buffett once called it “cigar butt investing” — finding stocks so beaten down that even one more puff could be profitable. With several household names now trading at discounts, the question for Tiger investors is clear: which crashed stocks are worth betting on?

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Why Oversold Stocks Matter Now

Markets have been on a tear, yet not every stock joined the rally. Some sectors — healthcare, consumer, even luxury — saw sharp corrections. For retail investors, these pullbacks can mean:

Entry points into quality companies at fairer valuations

Opportunities to align with institutional rotation (Buffett’s UNH buy is one signal)

Traps if structural problems outweigh the “cheapness”

As always, not every dip is a gift. Some are warnings.

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The Buffett Playbook 📊

In Q2 filings, Berkshire Hathaway revealed a $1.6B position in UnitedHealth (UNH), bought around $314 per share. Buffett’s logic? Healthcare’s demographic tailwinds and defensive cash flows.

> “When Buffett buys into a sector after a sell-off, it’s often a sign he sees resilience others are missing.”

This raises a key question: if UNH is worth a fresh Buffett bet, could other oversold names also be long-term winners? Let’s dive into four case studies.

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Case Study 1: UnitedHealth ($UnitedHealth(UNH)$  )

Bull case 🚀: Healthcare demand is sticky, US demographics support growth, and UNH’s insurance + data business offers diversification. Trading near $300, it’s below Buffett’s entry.

Bear case ⚠️: Rising regulatory scrutiny on insurers and potential reimbursement cuts could squeeze margins. Election-year uncertainty looms.

Neutral view 💡: Valuation is fair but not dirt cheap. Investors may need patience while political noise clears.

Why it matters: If Buffett is right, retail investors buying near $300 could ride a multi-year rebound.

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Case Study 2: Lululemon ($Lululemon Athletica(LULU)$  )

Bull case 🚀: Brand strength among affluent consumers, international growth (China in focus), and high-margin apparel. Shares corrected after weaker guidance, creating a dip.

Bear case ⚠️: Competition from Nike and Athleta intensifies. Valuation remains premium, even after a 20% drop.

Neutral view 💡: Growth story intact but expensive; may need multiple strong quarters to regain momentum.

Why it matters: Retail names often overshoot both up and down. LULU could be a “buy the dip” only for patient, growth-oriented investors.

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Case Study 3: Novo Nordisk ($Novo-Nordisk A/S(NVO)$  )

Bull case 🚀: Blockbuster obesity and diabetes drugs (Ozempic, Wegovy) are changing healthcare. Revenue growth is still strong despite volatility.

Bear case ⚠️: Recent correction highlights how much hype was priced in. Competition from Eli Lilly’s Zepbound is rising fast.

Neutral view 💡: Long-term megatrend remains intact, but near-term returns may depend on execution and regulatory approvals.

Why it matters: Sometimes sell-offs reset stretched valuations without breaking the growth thesis.

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Case Study 4: Eli Lilly ($Eli Lilly(LLY)$  )

Bull case 🚀: Dominant position in obesity and diabetes treatments, strong pipeline, and institutional money piling in.

Bear case ⚠️: After tripling in three years, the stock is priced for perfection. Even small misses could spark sharp pullbacks.

Neutral view 💡: Long-term winner, but short-term volatility could test retail investors’ conviction.

Why it matters: Momentum can fade, but megatrends (like obesity drugs) rarely vanish overnight.

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Risks and Traps 📉

Before chasing dips, investors should watch for:

Structural decline vs. cyclical weakness (e.g., regulatory headwinds vs. short-term demand dips)

Valuation traps — a 20% drop doesn’t always mean “cheap”

Position sizing — oversold bets are risky; don’t over-allocate

> “Buying oversold stocks can work — but only if you distinguish between broken stocks and broken narratives.”

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Takeaways for Retail Investors ✅

Buffett’s UNH buy suggests healthcare could be a defensive anchor for portfolios.

LULU offers growth optionality, but at premium valuation.

NVO and LLY are battling for obesity-drug dominance — megatrend intact, but volatility high.

Patience and risk management are key when entering oversold names.

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Final Thought

Oversold stocks can offer Buffett-style “cigar butt” puffs — or they can burn investors chasing cheapness.

Would you follow Buffett into UNH today at $300?

Which of these sold-off names — LULU, NVO, LLY — do you believe has the best rebound potential?

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