Which Straw Broke It?

The financial media will be picking through the wreckage, trying to figure out which straw was the one that did it…which bit of bad news sent stocks reeling today…

No doubt the tech bros at black box defense company Palantir (NASDAQ: PLTR) aren’t wild about a possible 8% cut to the defense budget. Investors seemed to have thought Palantir had a blank DoD check and the company could fill in any amount it wanted. I don’t know how else to explain the numbers – the stock trades with a forward P/E of 195 and a Price-to-Sales ratio of 95!

Those are the kind of valuations you see on fake mining penny stock pump and dumps, not members of the S&P 500.

And to think: two days ago, those numbers were 25% higher…

For Palantir investors, where do you step in? What price makes Palantir a value? Nobody knows what the company does anyway – maybe AI-controlled drone swarms? It’s a black box.

***Maybe Walmart was the straw. Last night the company said it could only muster 4% revenue growth and 5.5% profit growth over the next 12 months.

Now, a person might be tempted to think that growing $673 billion in revenue by 4% is pretty good. That’s about $27 billion in added sales. But when your trailing Price-to-Earnings ratio is 42, the fact that you can only turn 2.5 pennies in profit on every $1.00 you do in sales is hard to justify. Grow that profit by 5.5%, and that means profit becomes 2.63 pennies…

Between 2010 and 2017, Walmart’s P/E ratio was typically between 10 and 13. If you think about a P/E ratio in terms of a buyout, ie, you could pay off a loan to buy the company using the profits in 10 or 13 years, that valuation seems fairly reasonable…

In early 2017, Walmart’s P/E ratio broke over 16. By January 31, 2018, it was 28. At its lowest point during the COVID market, Walmart’s P/E bottomed out at 18.

So now it would take 42 years to pay off the loan out of profits (a P/E of 42). That’s maybe not so reasonable. Even if you factor in that extra 20th of a penny in earnings growth…

Cruise Line Taxes and Unemployment Claims?

New claims for unemployment and continuing claims were up a little last week. The data doesn’t yet include firing federal workers, so those numbers are going up. That matters because people have a tendency to cut their spending when they get fired.

We’ve already seen a surprise drop in January retail sales. Inflation numbers have risen for three straight months, the Fed is unanimous that rates aren’t getting cut any time soon, and the word “stagflation” is showing up in the financial media headlines.

Just wait until the financial media starts kicking around the idea that the Fed may have to reverse course and actually hike interest rates…

The next Consumer Price Index (CPI) comes out on March 12, just FYI.

***Cruise Lines are getting thumped today after billionaire Commerce Secretary Howard Lutnick said they shouldn’t be allowed to sail under non-US flags to avoid paying taxes. No word on if he still supports his own tax cut, safe to say he probably does.

And really, I’m not sure what the objection to have corporations pay more in taxes so that individual investors can pay less. Most of us aren’t corporate insiders with bonuses tied to profitability anyway.

But we are investors. Something like 57% of American employees have a 401K account. These accounts are mostly invested in S&P 500 index funds. And the performance of S&P 500 index funds is dominated by the Mag 7 – who also happen to be the companies with the biggest share buyback plans…

So if you want to argue for lower corporate taxes, the way to do it is to point out that share buybacks and dividends are good for most of us. And lower corporate taxes mean more buybacks and dividends.

In just the last 5 years, Apple has bought back at least $440 billion of its own stock. That absolutely has helped Apple’s share price and your 401K balance.

Of course, if you are a corporate insider, and have your bonus tied to your company’s profits, cutting both corporate tax and income tax is a pretty good way to go…your bonus gets bigger and you’re tax bill will be lower.

Unless of course, you’re an insider at Royal Carribbean (RCL) or Carnival (CCL). Then you might not like Lutnick’s proposal. And you definitely don’t like the 9% hit your stock is taking today.

Editor’s Note: Hammer recommended both stocks back on October 28. They’re up a little less than they were a couple days ago, but still sporting double-digit gains. And they are much cheaper than, say, Palantir. And they have much better growth prospects than, say, Walmart.

DeepSeek and Tariffs

In any event, today isn’t the first time we’ve picked through the straws that broke the market’s back recently. Two Monday’s in a row – January 27 and February 3 – we got blindsided with seemingly devastating rally killing bad news. The first was that Chinese AI model DeepeSeek which called into question every aspect of AI – from chip stocks to nuclear stocks…

Then it was the president’s weekend declaration that tariffs would be slapped on Mexico and Canada.

In each case, the weakness lasted a day (or less, in the case of the tariffs).

What are the odds that today’s sell-off is a one-day thing? Probably pretty high…

However, I feel obligated to go on the record and say that we, as investors and traders, are being trained to buy the dip, no matter what. “Who cares if we have no idea what Palantir actually does, just buy the dip, it’ll be back up tomorrow!” That’s the bull market playbook.

The bear market playbook is the exact opposite. Buying dips will wipe you out fast. I don’t know that we’re there yet. But with valuations rivaling those of the dotcom bubble, a reckoning of some sort will happen, just a matter of when.

Cheers,

Briton Ryle
Chief Investment Strategist
Outsider Club

X/Twitter: https://twitter.com/BritonRyle

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