We have been writing a lot about market valuations because they are at such extremely noteworthy levels. I thought it might be helpful to give a quick example of a stock that is at the heart of many of the key AI themes that are so in favor currently. Palantir (PLTR) has been an incredible stock, up a staggering 385% over the last year, despite selling off by 9.35% today. It really is a tremendous company that is tied in with the U.S. government and many of the largest corporations. Its tentacles are everywhere from how wars are fought, to how things are audited etc. They can process enormous amount of data and spit out results, culminating in actionable decision-making. In reality, we likely don’t know the half of what they do, as they have a lot of highly classified activities.
At a recent price of $157.75, the stock has a market capitalization of roughly $374B, or a little over 100x its trailing twelve-month sales of $3.44B. TTM net income was $763MM, so the stock trades at around 490x earnings. For a growth stock, buying it at a PEG, or price to growth rate under 1, or just over 1 is generally quite attractive, as that ratio factors in the growth rate unlike a standard P/E ratio. The PEG ratio for Palantir is 5.29.
Imagine paying $3.74MM for a business, that produces just $7,632 of net income a year. Does that seem attractive to you? That is the investment that is being made at current valuations. This doesn’t mean that Palantir can’t be a good stock still. It clearly has a lot of attractive business characteristics with amazing growth potential. What is does mean though, is that there is absolutely zero margin of safety. The potential for a 50%, or 90% permanent loss of capital is there, not saying that will happen. Our goal as investors though is to maximize risk-adjusted returns. We could bet all our retirement money playing blackjack winning four hands in a row, after doubling down each time, showing fantastic returns, but does that make us a smart investor? What are the odds as the next hand and the one after that plays out. Is that prudent decision making? Of course not.
When the market is in a bubble, many people get swept up in the hysteria. Bubbles are fun until they pop. What isn’t fun though is having to work ten more years than planned because you have 90% of your money in equities going into a 50% bear market. It’s not fun having to short sell your house because you can no longer make your mortgage. It’s not fun pulling money out of your IRA or 401K before you reach 59.5, eating penalties and paying taxes, because you are short on money. We are in a strange era where bear markets have been extremely short since the Great Recession hit in 2008. It has paid to buy the dips each time and generally we are believers in that logic, but those big bear markets that last a long time are also an inevitability that you must be ready for! Investors of TTCM will indeed be ready for that occurrence, while also being able to take advantage of the very attractive opportunities that currently exist in value stocks. Many healthcare, real estate, luxury goods, and consumer staples stocks are trading at very favorable valuations, paying large dividends as well. They might not be as sexy as a Palantir but could offer much better returns over the next 5-10 years. We will put out some examples in the next few weeks in this newsletter so please stay tuned.
