Today's menu

• The companies

• Red-hot stock prices

• Profits

• Return on capital employed

• Valuation

• Investing lessons

• Was I tempted?

The companies

Let's start with a quick introduction to the companies before we see how red-hot they are:

1. Palantir Technologies (PLTR): Palantir Technologies develops data integration and analytics software platforms for government and commercial clients.

2. CrowdStrike (CRWD): CrowdStrike provides cloud-native cybersecurity platforms that protect endpoints, cloud workloads, and identities using AI and threat intelligence.

3. Axon Enterprise (AXON): Axon Enterprise manufactures public safety technologies, including body-worn cameras, tasers and cloud-based evidence management software for law enforcement.

4. Rocket Lab (RKLB): Rocket Lab offers small satellite launch services, spacecraft manufacturing and mission solutions for commercial and government space operations.

5. Cloudflare (NET): Cloudflare delivers cloud-based services for website performance, security and edge computing to protect and accelerate online applications.

Red-hot stock prices

What makes them red-hot? Their stock price performance.

Over the past 3-years they were growing annually as follows:

• Palantir: 188%

• Rocket Lab: 124%

• Axon: 84%

• Cloudflare: 58%

• Crowdstrike: 44%

The average return is 99.6% per year. That means you could double your money every year.

Right about now, you’re starting to think, “I've been missing out, I’ve gotta to buy these”.

Hold your horses, let’s see if these companies are any good.

Profits

Apologies for the 5-in-1 graph. Let me explain how it works.

In the graph, we have six years (2020-2025) and each company's profit is shown in a different colour. Just look at whether each colour bar is going up or not.

EBITDA is a basic measure of profitability in a company. It tells us whether a company can make a product and sell it for a profit. If the bar in the graph is negative, the company is losing money.

For example, Palantir (the blue bar) has been going up steadily each year. It went from negative in 2020 to positive in 2025. It is improving and making money.

The other companies are all over the place, which is not good.

Surprisingly, our red-hot stocks aren’t all making a profit.

Return on capital employed (ROCE)

We like to look at ROCE. As a rule of thumb, we say that anything above 15% is good.

Here is another 5-in-1 graph, showing ROCE for each company. Palantir is the only company whose ROCE has increased and is now at 10.7% in 2025 - that is respectable but not great.

The rest of these companies’ returns are all over the place, which is also not good.

Price-to-free cash flow (P/FCF)

Let’s look at valuation using the price-to-free cash flow ratio for each company:

• Cloudflare: 361

• Axon: 315

• Palantir: 246

• Crowdstrike: 109

• Rocket Lab: -110

What do these numbers mean?

It means you’re paying for 361 years of Cloudflare’s cash flow up front. If the company doesn’t grow, it will take 361 years to get back the money that you paid to buy the share.

As you can tell, these numbers are crazy (in a bad way).

Even for a red-hot stock in this market, it is concerning when the ratio is above 25. Negative is also not good, because then the company is spending cash, not making cash.

Investing lessons

As you can tell, there’s disconnect here. The stock prices are sky-rocketing but the companies aren’t that profitable yet.

What is going on?

These are growth companies. That means they are growing sales fast, but unprofitably. The hope is that one day profits will come. Investors betting on these companies pay huge prices upfront for the possibility that they make it big someday. Alternatively, the companies can fail and the investors can lose their money.

I didn’t choose these companies to make an example. These are companies that a well known chief market strategist (whatever that means) has in his portfolio. To be fair, I don’t think this guy is lying. I believe that he owns these companies and his portfolio has done well.

The problem is that seeing stuff like this creates FOMO (fear of missing out). Greed creeps in and that can result in you making catastrophic investment mistakes. Even professionals can be tempted by the devil of super high returns.

So when you see stuff that seems like quick money, I want you to calm down and start thinking.

Here’s some questions to help guide your thinking:

• Look at the numbers: 

  • Is the company profitable?

  • Are they getting better or worse?

  • Can you justify the valuation of the company?

• What is driving these stocks?

  • Why are they going up so fast?

  • Are the companies doing well or is this a pump-and-dump scheme?

  • If anything goes wrong, will the prices come down just as fast?

• Does this fit my investment philosophy?

  • Do I understand investments like this?

  • If I bought stock, could I stick with it?

  • Am I being tempted by returns?

If you answer these questions, your investment brain will kick into gear. That is why I took you through the graphs. When you saw the stock price returns, you were willing to buy. But once you saw negative profits, low returns and high valuations, you started to get suspicious.

There’s a saying "easy come, easy go”.

This is very true in the markets, things that go up very quickly can come down equally quickly. That doesn’t mean you can't participate in growth companies. If you’ve done your homework and you feel that you want to own a growth company, you can.

Just remember, stocks are not lottery tickets. They represent ownership in a company.

Was I tempted to buy?

Nope.

These companies don't fit into my Extraordinary Companies investment philosophy:

• They are not quality companies.

• The numbers don’t show what I am looking for.

• I don’t know if they have sustainable competitive advantages.

If I am unsure about a company, then I am not tempted to buy, even if I miss out on returns.

If you're a new reader, I explained the secrets to being an Extraordinary Investor below.

I would like to hear what you’re up to.

DM me on social media or email me.