IS VALUE INVESTING DEAD?

02/06/25 Prospero.Ai Investing (192nd) Edition (Midweek)

Think back for a second and try to remember what you were doing in June of 2024. That was about 8 months ago. I (Matt) was on a fundraising/business trip and we had taken some investors fishing in Canada. One of the guys I was with was a Private Wealth Manager from one of the top firms in the U.S. He was brilliant and had made more money than I will in 2 lifetimes. Seizing the opportunity to learn a few things, I began to ask him about his strategies and techniques. He informed me that at heart, like our CEO at Prospero, he was a value investor. Our conversation drifted to the Bull Market that had been raging since the previous October of '22. He said his company had done well, but he was deeply concerned about the valuations. He bemoaned the fact that there was such a small concentration of stocks that held up the S&P. He also talked about how P/E ratios had grown beyond his metrics. I, of course, had been writing for Prospero. I was neck deep in thinking in terms of A.I. and the changing landscape of technology. I asked him about the revenue growth of NVDA and the future potential of companies like TSLA. But he couldn't get over the fact that those companies simply didn't meet his traditional value metrics. I asked him what his fund’s strategy was moving forward. His response: "CASH. There just isn't much value to be had. We’re mostly sitting this one out". That was a year and half ago. Since that moment on the boat, the S&P 500 and Nasdaq have risen to the tune of 30-40%. So, here's the question: is Value Investing dead? Are the traditional metrics of valuing a company gone? The answer looks to be yes as it relates to certain stocks and traditional value metrics. But will this bleed into the whole market at some point? We've been in the grips of a long and historic bull market that was driven by what arguably might be the 4th industrial revolution. But the reality remains that the traditional metrics that market makers use to value companies were price targets. That gave them a range in which to gauge value. For those that don’t know how they are made. Analysts pour through the company guidance, insert their own assumptions on growth around key drivers of the business and Macroeconomic scenarios and in the end forecast cash flows going forward. These are turned into generally a DCF model. Which allows an interpolation of price. P/E ratios have generally (other than some bubble situations) guardrails for valuations. But today, think about how far Palatir's Price Targets are off from how investors are valuing that company! Heading into earnings RBC had the Price Targets of PLTR at $18! After they only moved it up to $40. Even after the stock crossed 100 after earnings many analysts upped their below $100 price targets and most maxed them out at $100. As of the writing of this letter, the stock is trading over $100. Pretty big discrepancy. Why? Because that $40 price target is based on those traditional value metrics. These are very rough numbers, but we learned at their earnings, that PLTR increased top line profits to the tune of about $79 MILLION. But the value of their market cap rose in the BILLIONS. One more example. CAVA. It has risen a staggering 176% over the last year. Their current P/E ratio is in the 300's. Why? Investors are currently valuing that company on FUTURE growth possibilities. And therein lies the interesting part: some of this we think is quite founded. How many times did we hear NVDA was overvalued as it dwarfed its previous growth by leaps and bounds? Warren Buffet famously turned down an AMZN investment because he couldn’t agree with the growth multiples Bezos was projecting. And Bezos CRUSHED those. Analysts don’t accept or know how to deal with what we have accepted. Momentum is part of the market now. And it is part of it for good reasons. See Moore’s law. Technology innovation IS accelerating. Deepseek is another chapter in that long story. I don’t necessarily agree with this for CAVA but I do agree with PLTR that Analysts are underestimating just how much its growth will accelerate. Now we own CAVA and we actually dumped PLTR (Net Options dipped below 50 yesterday) but that is because of Net Options Sentiment and one thing that we live by at Prospero is that if we see clear signs of momentum we try to capitalize on it.

There's a lot to be said about this, but here's the reality. Whether it's A.I. stocks, Quantum Computing or Chipotle Style Mediterranean food restaurants, valuations aren't based on what they used to be. The good news is that we don't have to worry as much about a company being overvalued. Why? We have the power to watch the numbers in Prospero and see what the institutions are thinking about it. Then react accordingly. Will these new metrics of valuing a company last over the course of a major downturn? We might be about to find out. But the pace in which Tech is changing the world is only going to accelerate. Should be interesting! Now a word from our CEO.

A WORD FROM OUR CEO

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IS VALUE INVESTING DEAD?

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