Escalator Up, Elevator Down
The market has defied classic investment logic for many years now with the “buy, hold and buy more strategy” on dips winning handsomely. Kudos to all of our 401Ks! Lately, on the up days, I read bulls discussing the “story” or the “narrative” without any regard for valuation. Well, actually it’s been this way now since the pandemic. Buy companies with “moats” they say! BTC wants $100,000 they say! It’s the small caps turn they say! It’s no wonder value investor David Einhorn keeps repeating that the market mechanisms are broke and logic went home years ago. We always, always, always have to adapt to the market environment we are currently in, not the one we wish we are in or the one that works best for our style. However, the minute you lose discipline, strategy drift or lean in a direction that makes you uncomfortable, it is usually a sign that the tides could be turning.
Palantir is a wonderful company. They will generate about $1 billion in free cash flow in 2024 and 2025. They seem to be a 25% grower for the next few years, maybe even a bit more. Operating margins are also expanding. They are benefitting from AI more than most software companies. They may even have a true technology moat. The market capitalization is now $145 billion! During a nasty day in the markets Friday, the stock was up $6.59. The short interest is 85 million shares. My opinion, you asked? None. My brain won’t let me buy a stock at 150 times earnings. If it were cut in 1/2 it still wouldn’t be on my radar. This is a talent, if you will, I have developed during a career of having success and making big mistakes. If something does not make sense to me, I stay away unless there is specific reason (news?) or set up. If PLTR gaps up again on Monday, will I short it? Probably for a quick trade. No holy wars or stock jihads for me. If it gaps up again, that is a set up that could work and the stock reverses. Absent that, I will let it trade 100 million shares daily without me while Dan Ives cheerleads in his used car salesman suits. SNOW had the same chart and multiple until it told the markets it wasn’t going to see accelerating growth and in fact a massive deceleration. Yet, SNOW is still 135x earnings after being cut in 1/2 and we still have sellsiders pumping on a re-acceleration equals buy, at any valuation.
At some point in time, the escalator hits a level where there is no place higher for it to climb unless you expand the building. The buyers are all full, the shorts have all capitulated and, on the slightest change in narrative, the elevator cables snap and descends so fast that everyone stuck inside is muddled on impact. Friday had that feel to it. Retail sales in October came in better. The prior day Powell’s word salad sounded like he wasn’t sure he wanted to cut rates in December. Applied Materials, an AI hopeful turned cyclical as usual, dropped 9% switching digits from $186 to $168 on a cloudy 2025 outlook. Someone yelled fire in the movie theatre that RFK Jr. will run the Department of Health and Human Services with the XBI dropping 5% in a delayed response. The IWM became a Trump winner, for some reason post-election, and went from $224 to $241 in a straight line and closed Friday back at $228. Escalator up, elevator down, yep!
Or maybe the selling is what my friend sent me this morning: