Lofty valuations, overheated technicals - managing market risk with Victor Dergunov

0:11Victor Dergunov, The Financial Profit on Seeking Alpha. Very happy to have you back on Investing Experts. Always great to talk to you. It's my pleasure, Raina. Thank you for having me. I'm really glad to be here. Looking forward to the discussion. Absolutely. It's always great to have you on. Like I said, you have an investing group called The Financial Profit you were on a few months ago, talking about some tech names, Fed rate cuts and different names like the Mag7s and different tech names that you were getting in and out of. What would you say, here we are at the beginning of November, what would you say you're thinking most about these days as you're looking at your portfolio, as you're talking to your subscribers, what are you thinking most about?

0:49I would say I'm thinking most about risk management here. And I'll tell you why. we've had a sensational year my all-weather portfolio is up by about 73 percent year-to-date it's been doing great you know we nailed that april bottom um i pretty much went all in there and just you know on names like palantir um amd below 80 dollars nvidia um celestica so and and many more other names, Tesla and so on. So, I mean, we've had a great, great year. But I have to say that more recently, the market has started to look a little bit shaky here. And maybe that's for several reasons. I think the most recent wave of the push higher may be driven more by retail investors, I believe.

1:46And I think we're really getting those valuations at such a lofty level. And at the same time, we have the technical conditions kind of overheating. So, I mean, we're seeing really, really high valuations, not in only the speculative names and, you know, like the pre-revenue and the pre-profitability names, but also in the, you know, in the Palantirs and, you know, something ridiculous like 100 times forward sales. multiple. It was like a$500 billion company. Recently, I actually shorted the stock at$207. So I've had a really nice short on Palantir. And I've just been looking at the market in recent weeks.

2:36I had an article published recently talking about why the market is probably due for a correction here. So it's just a combination of really, really high valuations in in many names that a lot of people own, you know, along with really kind of overheating technical conditions. And then, you know, this one element that really kind of stands out is the Federal Reserve being more hawkish than expected, because during the last FOMC meeting, Fed Chair Powell used some really, really strong rhetoric. And he said that, you know, the December rate cut is basically far from a foregone conclusion. So that tells me that there's a lot of uncertainty regarding the December rate cut.

3:29So I've been looking at the probabilities at the CME FedWatch tool, and they've basically gone down from about over 90 % probability of a rate cut in December to below 70%. And I still think that that's being optimistic, you know, given his tone, given the uncertainty, considering that we're not getting a lot of the data because of the shutdown. So, you know, there's that concern. And on top of that, there just seems to be fewer and fewer catalysts that are likely to push markets and especially more speculative stocks higher here in the near term as we kind of exit earnings season. I appreciate that.

4:13Yeah, there's a lot to get into in your answer. I think maybe if we could start with Palantir, because you've been on over the years a few times touting your bullishness on that company, on that stock. Can you talk to us about your journey there and what you envision and why you decided to short it and when you got in and when you got out and how you would encourage maybe your average retail investor, how they should be thinking about that stock and I guess valuations. Okay. Okay. So, I mean, yeah, when it comes to Palantir, I love the company. I love the technology. I love, you know, I love that it's a monopoly.

4:51There's so much to love about Palantir. But the one thing that I don't love about Palantir is its valuation. And at the end of the day, valuations, they do matter. When you're talking about a$500 billion company, I mean, that's how Hyatt's market cap basically got recently, you know, and its projected revenues are only about$6 billion next year. I mean, you're talking about a company trading at roughly 100 times forward sales. So, I mean, that's pretty ridiculous. My journey with Palantir has been extremely favorable because I identified the company really, really early in 2022 and in 2023 as an AI optimization monopoly, basically.

5:41And I wrote about it relentlessly and I actually built it into my top portfolio holding when the stock was just$6 or$7. It was in that$6 to$7 range for a long time because I think it was because many people misunderstood the company. They didn't really understand what it did. It was kind of like a black box. but I kept on kind of, you know, just hammering down on it, just telling people that, look, this is a great company. They have a revolutionary, you know, product service. They're going to be the leader in AI. So I got into it really early and I got a lot of my investment group members, of course, into it very, very early.

6:29And we've just had a stellar journey from that$6 to$7 range. It went to$20, then$30, then$40, then$50, you know, et cetera, et cetera. And I had that, you know, I initially made it into like a 10 or a 15 % position and it just grew to like a 20, 25 % portfolio position. And then of course I started trimming along the way. I took some profits in like the$70,$80 range at 100. I also bought the dip in Palantir during the April drop. I doubled my position there. And then I got out of most of my position around 150 to 170, I believe, because I started just seeing that the valuation just stopped making sense to me.

7:18And I think it just became like the ultimate kind of, I don't want to call it a meme stock, But I will go ahead and just say that, you know, it's gotten, I believe it's gotten to that stage where it's just like the ultimate meme stock now where, you know, the valuation doesn't matter. And, you know, we had the CEO on the other day criticizing Michael Berry's short position, you know, basically saying that Palantir's valuation doesn't matter. And I mean, he's the CEO. So, of course, I understand Alan Karp could say that. But, you know, from my perspective, the valuation does matter. So that's why I went ahead and actually shorted the stock the day before earnings, because I realized that really no matter how good earnings were or would be, they probably wouldn't be spectacular enough to push the stock, you know, higher above that$210, you know, kind resistance range.

8:20So the stocks had quite a fall since I've since covered part of my short position. I'm still short some Palantir here. But that's basically been my journey in the stock. And my advice for the, I guess, for the average investor looking to get into Palantir is just to be not to just jump in blind here, kind of be mindful of the valuation. Yes, it's a great company, you know, yes, it's a monopoly in its space. Yes, it has a very bright future. But you really need to also consider the price, you know, that you're paying for your shares. Because right now, I still think that they're priced that they're priced kind of ridiculously high.

9:00Now, if I were to get back into the stock, I would kind of have to put myself in the market's place and then say, when does the stock get a bid? Because I mean, the valuation is not going to make sense for a while here, not unless it has like a really, really significant decline, which I don't think, you know, I don't think Palantir is going to get cut in half here or anything. So I do think that around maybe 140 or 150, if it gets down into that range, perhaps it becomes, you know, maybe a buy again, and I may step back into it. We'll see how markets are and just how the broader economic landscape is then.

9:38Their biggest catalysts are, you know, it's the basically the commercial segment, you know, continued growth with its AIP program, AIP platform in the commercial segment. And especially I would say internationally, because it's getting, it's gotten a lot of growth domestically in the United States, but it can also continue to get more and more business outside of the United States. And, you know, Palantir, what makes Palantir so unique and such an amazing company is that no matter, you know, what kind of institution it is, whether it's a private enterprise or a public institution or a government agency, whether it's domestic or foreign, it doesn't matter.

10:27It can benefit from Palantir's products and services. I think that's really the greatest catalyst that there's such a an enormous market out there you know and the company has such a has such a just such a massive growth runway that it can continue to expand revenues at maybe 25 30 or 35 percent for years and years and years and it can continue to grow earnings per share at like maybe 30 to 50 percent at a 30 to 50 percent annual rate for you know maybe 10 or maybe even 15 years. So that's, these are, of course, like it's, I think it's its greatest catalyst, its enormous growth potential, and just the way that the company can continue to expand its profitability, because it, you know, it has a very, very profitable business, something like an 82 % gross margin.

11:18So, but again, the valuation is a concern and valuations do matter at the end of the day. And when you're talking about a stock that's, you know, even though it does have such an amazing growth rate, still one must be mindful of the 100 times sales valuation that it trades at. What else would you add to the conversation, be it by an example with a stock or just things to keep in mind? Are there sector-specific things? Are there stock-specific things? Are there other metrics that investors should be paying more attention to when we're talking about these valuation concerns because they certainly are challenges to, they bring a lot of challenges to the investor's purview, I would say.

12:05Yeah, I mean, certainly. And it's, all these factors are kind of industry and company specific. But if we're talking about the, you know, the AI space, because that's where much of the concerns relative to valuations are in the AI space and the more kind of speculative futuristic industries like EVTOL or whether it's, you know, the futuristic drone industry or whether it's the, you know, SMR nuclear space. All of these have, you know, all of these spaces have these sorts of valuation concerns. And And they're kind of in a way tied into AI, especially if we're talking about nuclear, because, you know, that's where a lot of the AI energy will likely be coming from in the future.

12:57So I think basically AI has gotten so big and it's – and I don't want to say that it's, you know, that it's hype because, of course, it's not all hype. there are a lot of great use potentials there and a lot of potential for corporate optimization and things of that nature. And AI is, of course, very useful in so many ways. But at the end of the day, we still have to be mindful that the build-out process will slow at some point. And maybe we're starting to see little hints of that in certain areas. And we're also seeing the AI spending kind of weighing on profitability in some cases, like, for instance, in Meta's case, how it missed its recent EPS estimates.

13:57It just seems like some segments and some companies may be getting ahead of themselves in how much they're spending with AI and how much they're investing in AI and exactly how profitable is that going to be for them in the future? Is the spending justified is the question. And also there are a lot of companies out there that perform different AI services. I think Celestica is a good example where this stock has gone up from something like$60 during the April crash to almost$400 now. And it's trading like, you know, like almost like a Palantir stock. And it's a great company. I think it does a really good job at what it does.

14:47But it's a low margin company. It has, you know, Palantir has an 82 % gross margin. Celestica has like a 12 % gross margin. But now it's trading at like a forward P ratio of like, I think like a 50 or 60 or something like that. So it's gotten extremely expensive here. And people, you know, they're kind of just painting all of these AI companies with, you know, with like one brush, it seems like they say like, it's a dominant AI company in its space. So perhaps it deserves any kind of valuation that the market kind of throws at it. But at the end of the day, I think that may not be the case. So I think a lot of these valuations are going to probably correct by quite a bit.

15:34And possibly, we're already starting to see that, you know, in this pullback that's occurring now, I think it could gather some, some steam, and kind of, you know, maybe can deflate some of this, some of this air out of the I don't want to call it the AI bubble, because, you know, I do believe that there's a lot more growth in the AI segment. And there's a lot of potential there. But, you know, there's certainly a lot of froth in the space that should be removed in order for the AI bull market to remain healthy. Speaking of that AI bubble and this growth opportunity, but also being cognizant of the concerns, what would you say about this market that we're in that is clearly driven by this AI momentum?

16:21What would you say about the sustainability of it and what investors should be aware of or should be looking for as it develops And do you have, how are you weighing in on how you envision the next, let's say, three months, six months, 12 months, if you'd care to weigh in that far ahead? Yeah, sure. That's a great question. So I think that this AI, I don't want to call it a bubble, but this AI growth trajectory that we've been on, it kind of comes in waves. So very recently, we've been on this really high optimism wave, and it's caused a lot of stocks to go very, very high. And it's caused many valuations to become arguably, basically, it's caused many stocks to become arguably expensive.

17:18And it's also enabled technical conditions in many stocks to become extremely overextended in the near term. So looking at the AI trajectory from this perspective, trees, they don't grow to the sky, basically. And stocks, they shouldn't, and even AI stocks, they should not increase perpetually without healthy pullbacks and corrections. so i believe you know we've had this really really nice ai wave since you know since the april bottom it's done really really well we've seen extraordinary moves in stocks like oracle amd nvidia etc etc etc and i just think that it may be time for for a little bit of a break Now, I'm not talking about the whole AI growth cycle ending here.

18:16What I'm talking about is some sort of a rational pullback that would get those technical conditions a little bit more in line with reality. That would get those valuations, that would just get some froth, a little bit of the froth out of some of these more elevated valuations. But I do think that there's a lot of growth ahead still. I found it interesting when you say the, I don't want to call it a bubble. It's kind of like that's how maybe I would categorize it, that I don't want to call it a bubble bubble that we're in. It's because it's, you know, we talk a lot about the unknowable nature of the present moment that we find ourselves in.

19:03And I feel like to that point, it's a new kind of bubble. You know, it's the new normal bubble. It's not the old kind of bubble that we're used to. It's true. And I mean, if you think about it, almost any market cycle can be called a bubble. Like the internet revolution was a bubble. The housing boom ended up being a bubble in 2021. Which is, sorry to interrupt you, but which is I think everybody's point that what those things led to and will they lead us to the same places today um well yeah what would you say are the salient differences i would say that well first of all there are a lot of people openly calling it a bubble even sam altman not too long ago said that you know we are in an ai bubble and um so i'm not going to argue with him of course we have we've had a lot of people coming out recently.

20:01I'm not a, you know, I'm not like a huge Michael Berry fan, but, you know, he was right on the financial crisis. He's been wrong on a lot of things like Tesla on the market bottom in 2022. He said that, you know, the bear market would continue. He said that, you know, 2023 at the beginning was the time to sell. So he's been wrong on a lot of things. But, you know, that doesn't mean that he should be like dismissed completely when he says that, you know, he's short Palantir and NVIDIA. We are in an AI bubble. I think he said that. And but, you know, maybe more importantly, people like CEOs of Goldman Sachs and Morgan Stanley, you know, more recently raising concerns about valuations, saying that there's probably a 10 to a 15 percent correction sometime, you know, in the not so distant future.

20:51That kind of rhetoric is more concerning to me. When I see Berkshire Hathaway with like a$400 billion cash position, you know, why is Warren Buffett not putting that money to work? Why is he not buying back his own company stock here? These are some pressing questions. I mean, that is a lot of cash. There was like a$382 billion cash position now at Berkshire Hathaway. All of these things, when you kind of take a step back and look at them, they are concerning. We have to be mindful of these things and we have to kind of adapt our investment strategy, you know, in accordance to the ever-changing economic environment and AI landscape because it's such a huge part of the economic atmosphere now.

21:38It's all about AI these days. I mean, how does it compare to the internet bubble, for instance? Well, in the internet days, basically, there were many, many companies that weren't profitable and they were trading at obscene multiples, basically. And today, it's a little bit different because we do have companies that are very profitable like NVIDIA and like AMD and a lot of other companies that are associated with AI. But on the other hand of the equation, we have companies like Oklo, a lot of these other pre-revenue and very much pre-profitability companies that are trading at very high valuations.

22:24So in that regard, it is similar to the dot-com bubble. So there are some similarities, but there are also some important differences. Like a lot of companies that are very profitable and that, you know, that aren't trading at obscene multiples here. Again, like an AMD, an NVIDIA, you know, Google seems reasonable. Meta platforms has a reasonable multiple in my view and many other companies as well. But, you know, my question is what happens if NVIDIA's growth margins go down? what happened you know because there's increased competition now with amd and and we have uh broadcom and and marvell and other companies the hyperscalers making their own chips so i think these are concerns that you know what happens when when nvidia is is not as profitable as it is you know what happens to that five trillion dollar valuation and a lot of people kind of compare NVIDIA to Cisco.

23:28And I'm thinking, well, it is possible that, you know, NVIDIA may be like Cisco was in 1998 or something like that. Maybe we have, you know, the AI market can use a nice pullback here, you know, and then we could get some more, you know, some more upside. But, you know, at some point, the party is going to end and we are going to have a big meltdown, probably. So it's just a matter of staying vigilant, not being the bag holder in the end, so to say. What chair you land on as the music stops. Yeah, exactly. If we can extend the metaphor. As long as we're talking about tech, what other names would you add to that conversation in terms of ones you're paying attention to, ones you feel like investors may have the wrong idea about, specific portfolio names you'd care to highlight, anything else tech-wise you'd care to get into?

24:23Yeah. So, I mean, I still like a lot of names in the AI space, of course. AMD is one of my favorite companies. I do think it's gotten a little bit ahead of itself from a technical standpoint, maybe valuation-wise as well, because the stock has tripled or quadrupled even since It's April bottom. It's gone from like, I think around$70 to almost$270. So the gains there have been enormous. But I do think that on a pullback to around the$200 to the$100 and$70 range, I think it becomes much more attractive in that range. And likely AMD has a lot of potential ahead because it looks like it's starting to take some market share from NVIDIA.

25:18And it could also do very well in the CPU AI space. So in like your personal computers AI segment, AMD could do really well as well as in the server market. So it has a lot of potential ahead. And then, of course, Tesla is one of my largest positions. I think it's one of the most misunderstood companies in the market currently because it has so many businesses that are likely to do well in the future. Everyone knows about their EV segment, but of course, you know, that EV segment can improve quite a bit in the future. And I think that they can continue to grow and even grow a lot faster than the market anticipates.

26:00Then there's the energy generation and storage business, which is probably one of the best energy companies globally. And I think that business alone can be valued at like$200 billion now. Then there's the FSD segment where it can essentially possibly corner the market and deliver outstanding results in that space. And then, of course, Tesla is really a massive AI company. It has, you know, so much data coming in from all of its cars because all of its cars, they have cameras. That data gets pinged back to its supercomputer and that all gets incorporated with the AI. So we have to be mindful of that.

26:45So, I mean, really Tesla is also a massive data company. And then there's the robotics space. That may be a little bit further out in the future, but really that could be the next massive segment where it could be, you know, like a four or five or even an eight trillion dollar business in five or maybe 10 years. And these aren't my projections. I've seen, you know, Citigroup analysts and guys out of other banks saying that the robotics segment could be that large. It could be. And when you think about it, it's certainly possible. I mean, who wouldn't want a robot like doing their house chores and, you know, maybe walking their dog or, you know, doing whatever.

27:28You know, when you look at Tesla's robotics program, it's much, it just seems much more advanced than the competition. I mean, the robots, they look sleeker. They look better. They're very agile. They can, even the Gen 2 robot can basically hold an egg in its hands. The company is just making, it just has so much potential here that I really do believe it can become probably the biggest company in the world in the next five to 10 years. And also, you know, if you talk about Elon's pay package, that one trillion or so, whatever gets, you know, assigned by the board, that's predicated on basically the company becoming an$8 trillion company or greater.

28:14So he's really only going to get paid out all of that money if the company achieves that really massive, massive valuation down the line, which I think it's actually probable. I believe that investors should probably be mindful of that, especially anyone shorting Tesla for the intermediate or long-term trying to short it. I don't mind, you know, shorting the stock. I don't, but I don't mind. I don't mind the idea of shorting Tesla maybe here from like 450 to 400 or something like that. But if you're thinking that, you know, Tesla is going to fail or, you know, it's like a good long term shorter, you're buying like long term, you know, leaps to short the company.

29:00I think that, you know, that could be a very, very big, big miscalculation and a big mistake. You were talking at the beginning of our conversation about market catalysts. What would you say are the main market or some of the top catalysts that you see coming and what that may mean for the market? So that's actually one of the problems that I'm confronted with here is that we've seen so many of the positive catalysts. like, you know, we know about the tax cuts, you know, we know about the deregulation, we know about the AI story, we know about some of the some of the fiscal stimulus that's occurring and that's likely to go on.

29:47We know about the Fed easing and how you know, there's there's more uncertainty here now. So I think, in the near term, there's a lack of positive catalysts. However, looking out longer term into 2026, the most significant positive catalyst is actually the Federal Reserve. And the Fed is going to become much more dovish when a new Fed chair is selected in 2026. So once Fed Chair Powell goes, it's going to be a much different ballgame, I believe. And especially if Stephen Myron becomes the Fed chair, which seems likely in my view, this guy, you know, he's Trump's man. He is super, super dovish.

30:34He's the guy that, you know, wanted like five rate cuts. I think at the October meeting, he wanted something like 125 more basis points worth of cuts this year. Of course, the Fed is not going to do that. But, you know, if he's elected as the Fed chair, then we're looking at a much easier Fed, a much easier monetary policy, which equates to, you know, a lot more, probably a lot more growth and a lot more speculation, a lot more liquidity. and that's basically the environment that's really, really good for risk assets like stocks. So I think that's basically the main catalyst and that should also be beneficial to the overall economic growth story.

31:21GDP could do really well. We can see 3 % plus 3.5 % growth, I think it's very possible in 2026 and maybe even in 2027. So there's definitely a lot of growth potential and some really solid positive catalysts. But they're a little bit further down the line, I would say. We would have to look further into Q1, like late Q1, Q2, 2026. So right now, we're kind of dealing with this lack of positive catalysts, which is a near-term concerned, that could actually be the catalyst for the near-term pullback or correction that we could see accelerate in the near term, I think. And I would add to that, it seems like we're seeing a lack of catalysts.

32:13And I would say markets a bit divorced from the economic reality, it would seem. And then also a questioning. We saw some jobs data today. We're recording this on Thursday, November 6th. We saw some job cuts coming from October and also given this government shutdown, this historic government shutdown and what that means for the dearth of data that we have and what it means when we have data coming out in the coming months. And it's, you know, backward looking. And what does that mean to market sentiment? And I guess what's your sense of all that? Will the rate cuts counteract the trouble that we've had up until then?