One company is the face of the AI boom. The other keeps producing cash while traders bet against it. Which one would you rather own?
When the market swings this hard, it’s easy to assume everything is either fine or broken. Jimmy Mortimer, Chief Investment Officer at Solidarity Wealth, explains why the better question is whether or not the market is healthy, and why a handful of AI names are carrying so much of the weight, up and down. He compares two companies he calls the Prom King and the Valedictorian. He also shares a dinner reservation story that didn’t go the way he planned, and what it taught him about where AI is headed.
Transcript
If you’ve watched the market lately, you’ve been on a roller coaster. We had one of the best days in months, and the very next day was one of the worst, with the AI names leading the way down. Days like that tell you a lot.
When the market’s up, everybody assumes everything is fine, and when it drops, everybody assumes everything is broken. I’d rather ask a different question. Is this a healthy market, or a narrow one, where a handful of AI names pull everything else along with them up and down?
How Hedge Funds and Speculative Trading Influence Stock Prices
I’m Jimmy Mortimer with Solidarity Wealth. To answer that question, I look at who’s doing the buying and selling. You’ve got giant hedge funds, huge pools of money run for big institutions, and a lot of it exists purely to bet on whether a price will be different in one to three months. Then there’s a fast-growing corner built on prediction markets, where people make yes or no bets on whether something will happen.
There’s no business underneath that bet. It’s no different from walking into a casino in Vegas and putting it all on red 12. And off to the side, there’s a smaller group of us who still ask what the business is worth.
AI Stock Hype vs. Value Investing: The Prom King and the Valedictorian
When things don’t play out as fast as everybody wants, that group gets punished for it. You can see that play out with two industrial companies in the same industry. I’ll call them the Prom King and the Valedictorian.
The Prom King has become the face of the AI data center buildout. All those giant buildings full of computers that run AI tools. Traders have pushed its stock price to prices it has never seen before.
And when the mood around AI turns, a stock priced for perfection has a long way to fall. We’ve seen how fast that can happen. To offset their bet on the Prom King, a lot of those traders bet against another company in the same group.
The easy one to pick is the Valedictorian, because it isn’t the face of the AI buildout. So it gets pushed to the wayside and there’s a lot of pressure on its price. Meanwhile, the Valedictorian keeps doing its homework.
It’s producing a lot of free cash flow and with that cash, it’s buying back its own shares and raising its dividend. And it trades for a fraction of what the Prom King costs relative to its profits. So which one would you rather own?
Why Free Cash Flow Matters When Evaluating Stocks
That’s rule six in my eight rules of investing. Free cash flow is king. Earnings can be massaged and headlines can be spun, but cash is hard to fake. That brings me to a question I’m getting a lot.
Should You Invest in AI IPOs? Understanding Valuations and Risks
Several big AI companies are getting ready to go public and people ask me, should I go all in? Before a company goes public, the private market is the wild west. You spin the wheel and wherever it stops, that’s the valuation. Going public is walking into the Colosseum and the public markets are completely unforgiving.
If you need proof, look at how the AI names have traded lately. These companies don’t have profits yet, so you value them on their sales. Compare them that way with the AI companies already trading and a lot of those private price tags start to look pretty generous.
Using AI to Analyze IPO Filings and Investment Opportunities
And here’s the irony I love. Before a company goes public, it has to publish a filing that lays out its business and its finances. And I can’t remember a time when so many people were excited to read one.
These filings run around 400 pages though. So when someone tells me they’ve read it, I ask how? The answer is usually, well, I had the AI summarize it for me. So you skipped the homework and asked an AI tool whether an AI company is a good deal.
Of course it’s going to have nice things to say. That’s AI eating its own cooking.
We’ve seen buildouts like this before with telecom and the early internet. There were winners and there were a lot of bodies in the graveyard.
That’s where another one of my eight rules comes in. Rule number four is to be choosy. In investing, there’s no three strikes and you’re out. So you can let as many pitches go by as you want and wait for the one you understand.
AI Agents and Investment Opportunities Beyond AI Stocks
Now I use these tools myself. Not long ago, I asked an AI agent to get me a dinner reservation. It called the reservation app something like 200 times because there’s no off switch. The app ended up blocking my account and I’m actually still blocked today.
But think about what that tells you. These agents are going to make spending money easier than it’s ever been. So I ask who gets paid every time someone buys something, no matter which AI company wins.
Long-Term Investing: Focusing on Cash Flow and Business Fundamentals
It comes back to what I ask about every business. What’s your moat? What’s the advantage that keeps competitors from taking your customers? Right now, everybody is trying to figure out who the winners and losers in AI will be. And I don’t think anyone knows yet.
I can tell you what I look for while we wait to find out. I want businesses that produce cash and have years of results that I can study because that’s something I’d be comfortable owning for the long haul. I look at this as stewardship of your money and it’s hard for me to endorse something I wouldn’t do myself.
So the next time the S&P is up and someone tells you that everything’s fine, ask what’s doing the lifting. And the next time it drops and someone tells you everything’s broken, ask the same question.
Frequently Asked Questions
How do you value a company that doesn’t make a profit yet?
Without profits, investors often use a price-to-sales ratio, which compares a company’s total stock value with its yearly revenue. A high ratio means buyers are paying for growth that hasn’t happened yet. That’s why it also helps to look at whether a business produces cash and how it compares with its competitors.
What is free cash flow, and why does it matter to investors?
Free cash flow is the cash left after a company pays its bills and reinvests in itself. Profits on paper can be adjusted, but cash is much harder to fake. At Solidarity Wealth, strong and consistent free cash flow is one of the first things we look for before owning a company.
If the S&P 500 is up, does that mean the stock market is healthy?
Not always. The S&P 500 is weighted by company size, so a small number of very large companies can lift the whole index even while many others fall behind. Looking beneath the index at individual businesses, and what each one is worth, gives a clearer sense of how the market is doing.
