A Healthy Reset After an Irrepressible Rally
The recent market turmoil felt inevitable. For a long stretch, even bad news was being rewarded — and when bad news becomes good news, genuinely bad news is usually right around the corner. Valuations had stretched for what seemed like forever, with everyone talking about an AI bubble while the market behaved as though it were irrepressible. The consolidation and selling now underway should be read as healthy. It is essentially a rationalization: the recognition that there is no bad news left to ignore and no truly good news left to serve as a catalyst, yet stocks had been pushed higher and higher and higher into ridiculous valuation territory.
A central worry is the spending behavior of AI firms. When you look at how much these companies are pouring into the AI race, it does not appear that any amount will ever be enough. That makes profits and valuations extraordinarily stretched. The recently public SpaceX functions as something of a Trojan horse in this dynamic: priced at roughly 100 times revenue, it has people scratching their heads, and then — despite that enormous valuation and the huge sum raised — the company still had to go out and raise debt. The unavoidable question becomes: when will enough ever be enough?
The Biggest Risk: Underestimating the Cracks Beneath the Surface
If the rally has truly run out of bad news to ignore, the biggest danger now is investors underestimating the substantial cracks beneath the surface. One of the most important of these has been a huge spike in off-balance-sheet debt. Companies are effectively inventing new kinds of debt — Meta, for example, created a "residual value guarantee" — and off-balance-sheet leases are skyrocketing. As a result, people aren't seeing on the surface what is really going on underneath.
In a market where bad news is treated as good news, that means people are pulling out every accounting trick available to make things look as good as possible, all in service of raising as much money as they can in an overly bullish environment — SpaceX being the prime example. That, in turn, typically means there are a lot of cracks beneath the surface, which makes this precisely the kind of moment when doing your homework can pay off. The safer corner of the market, in this view, has been a "core earnings leaders" approach — one where the actual work has been done to clean the earnings numbers so that what you are looking at is a true number rather than a dressed-up one.
Where the Market Is Misreading Winners and Losers
So where should money go if the AI fever is starting to break? Everyone already knows who the so-called winners are — the stocks that have gone up and up despite nearly anything that might have brought them down. The hard question is where to find good stocks to put money into now. The answer is to go where no one else is looking and no one else is thinking yet.
Two examples illustrate the approach:
CVR Partners — a fertilizer business few people talk about. Its plant in Coffeyville can use both petroleum coke and natural gas as feedstock, allowing it to structurally produce cheaper fertilizer. This matters in a world where the supply of fertilizer is structurally under-supplied. It is exactly the kind of obscure name you have to be willing to seek out if you want to be successful.
Crocs — a company you may have heard of but that isn't popular as an investment. Its valuation implies that its profits will never grow, even though those profits have been compounding at roughly 10% to 20% annually.
The Crocs Case: A Valuation Mismatch
Crocs deserves a closer look. The Hey Dude acquisition has been a drag — a black eye for the company — and yet profits have continued to churn higher anyway, a testament to how strong the underlying business is. There is good reason to think the company will turn the Hey Dude situation around.
What many people miss is that Crocs has genuine advantages in marketing: a smarter, low-cost TikTok strategy than competitors, which has driven a tremendous amount of profit growth. But the most attractive feature is the valuation itself. The stock price implies zero profit growth from now into the future, even negative growth, while profits are in fact growing. That mismatch — between a valuation implying zero-to-negative growth and a business that is actually expanding — is exactly what makes a stock attractive.
This is the mirror image of what is happening in tech, where the profit growth implied by the stock price is astronomical. By this math, SpaceX would have to reach over $1.7 trillion in revenue just to justify its current price — a ridiculous bar. Crocs, by contrast, only needs revenue to stay flat to justify its price. The broader lesson: there is a wide disconnect between "popular and overpriced" on one side and "unpopular but underpriced" on the other.
The SpaceX Problem: Forced Demand and a Capital Shortfall
SpaceX is a complicated story. Having been public for only about a week and a half, with options trading already enabled, the shares have been all over the place. A large part of its demand is built-in — the forced buying, or forced inclusion, in the indices. It is almost a shame for society that trillions of dollars sitting in retirement accounts are compelled to buy the SpaceX IPO, and potentially other IPOs, whether the account holders know it or not. At least during the dot-com tech bubble, people had a choice about whether to buy wild IPOs; now that choice has been removed.
Despite this support, the pressure on SpaceX is likely to stay high. As predicted in a pre-IPO assessment, the amount of money raised in the offering is not enough to pay the bills. Most of that money simply went to pay off bad debts and short-term obligations that got the company to where it is. Having just raised equity capital, it is immediately turning back to the debt market because it needs still more money to keep up in the AI race — and even so, it is spending only pennies on the dollar compared with the likes of Google and Microsoft. How the company keeps this up is genuinely unclear.
The one wildcard is Elon Musk himself, who has convinced people to do crazier things than keep buying his most recent IPO; there is no telling what he can persuade people to do. But the valuation implies an extraordinarily high level of future profits, and the company lacks the capital it needs to invest in order to achieve them. From an economic and mathematical perspective, the numbers simply don't work. Musk has worked his magic before, so the open question is how long he can keep people from paying attention to the math.
The Same Logic Applies to the Mag 7
Does this argument extend to the entire group of mega-cap technology names — a cohort that has actually been fairly stagnant lately? Yes, and the situation is outrageous. Their valuations imply enormous levels of profits and profit growth, while the companies aren't delivering. In fact, profits are highly negative and will remain highly negative for a long time, simply to fund the basic spending required to stay in the AI race. (Tesla, by contrast, has almost been forgotten amid all the SpaceX volatility, though Musk's name still ties these stories together.)
The Underlying Philosophy: Margin of Safety Over Speculation
The throughline is a preference for low-risk, high-reward setups and an avoidance of stocks whose valuations imply so much future profit growth that they become super risky. It is far better to own stocks whose prices already imply that profits will decline — because that is low risk, that is margin of safety, that is everything you want in investing. Expensive stocks are really about trading and speculation, which is a game worth staying away from.
The AI trade has run its course, and that breakdown is visible right now. The durable strategy is the one that has worked: picking profitable stocks that almost no one knows about and that remain remarkably cheap. In a market built on bad news being treated as good news, that kind of homework — and that kind of realism — is exactly what pays off.
