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Palantir (PLTR) announced strong quarterly earnings. The AI software giant beat Wall Street’s expectations on both revenue and profits… exactly what investors wanted to hear.

So naturally, the stock surged higher, right?

Not quite.

After a brief pop in after-hours trading, Palantir shares actually fell about 7-8%. And this isn’t an isolated incident. We’re seeing the same pattern across multiple high-flying AI stocks.

Here’s a quick take I posted on LinkedIn

Now, if you’ve been following the AI boom for the past couple of years (and who hasn’t?), this might seem confusing. These companies are delivering on their promises! They’re growing revenue at incredible rates! The technology is revolutionary!

[Full Disclosure: I set up a bearish position on Palantir this morning as part of my Speculative Trading Program. Click the link for real-time access to my most aggressive trades.]

So what’s happening?

Profit Taking is Part of the Bull Market Process

Here’s the thing about bull markets… they don’t move in straight lines. And when a sector has run as hot as AI has over the past two years (with stocks like Nvidia, Palantir, and Microsoft posting triple-digit gains), smart investors start taking some chips off the table.

Think of it like this: You’ve been at the poker table for hours, and you’ve turned your original buy-in into a massive stack of chips. Sure, you might win even more if you keep playing. But at some point, it makes sense to pocket some of those winnings and look for the next game.

That’s exactly what’s happening right now.

Capital is rotating out of speculative AI stocks that have already had their big run… and it needs to find a new home.

Enter: Biotech

Now here’s where things get really interesting.

What if I told you there’s an entire sector that:

• Will be one of the biggest beneficiaries of AI technology
• Is largely overlooked and under-owned by investors
• Trades at bargain valuations compared to expected profits
• Has the potential for both profit growth and exciting breakthrough discoveries

That sector is biotech.

AI Is About to Transform Medicine

The same AI technology that’s been powering chatbots and improving software is about to revolutionize how we develop drugs and treat diseases.

Using AI to test how drugs will react to different diseases will create entirely new opportunities to treat humans. Scientists can now run thousands of virtual experiments in the time it used to take to run just a few real-world tests.

And here’s the really exciting part: AI will help researchers minimize side effects for specific patients at risk. We’re moving toward a future where biotech companies can create drugs tailored specifically for each individual’s DNA!

Think about that for a moment… Instead of a one-size-fits-all approach to medicine, we’re heading toward truly personalized treatments. This isn’t science fiction—it’s happening right now in labs across the country.

The Valuation Gap Is Enormous

While AI stocks have been bid up to nosebleed valuations (Palantir trades for roughly 215 times next year’s expected profits) many biotech stocks are downright cheap.

The iShares Biotechnology ETF has actually underperformed the broader market this year. We’re seeing established biotech companies trading at 10-15 times earnings… while they’re integrating the same AI technologies that have made software companies Wall Street darlings.

This creates a natural hunting ground for investors rotating out of expensive AI stocks and looking for the next growth opportunity.

Two Ways to Win

Here’s what makes this setup so compelling: Biotech investors could win in two different ways over the next few quarters.

First, there’s the fundamental story: As AI accelerates drug discovery and development, these companies should see their profit expectations climb. Shorter development timelines mean lower costs and faster paths to revenue.

Second (and this is equally important) there’s the sentiment story: Right now, biotech stocks are unloved and under-owned. As more investors recognize the AI-biotech connection, money will flow into the sector.

That means investors won’t just pay more for higher earnings… they’ll also be willing to pay a premium for those earnings as optimism improves.

It’s the best of both worlds: Growing profits and expanding valuation multiples.

This Is How Market Leadership Changes

I’ve been investing professionally for more than two decades, and I’ve seen this rotation pattern play out multiple times.

The dot-com leaders of the late 1990s gave way to new opportunities in the 2000s. The financial stocks that dominated the mid-2000s eventually handed the baton to tech and healthcare. And the pandemic winners of 2020-2021 have now made room for new leaders.

The key is recognizing these rotations as they’re happening—not six months after they’re already in the rearview mirror.

Right now, we’re watching capital flow out of high-priced AI momentum stocks. That money doesn’t just disappear. It finds new opportunities. And biotech stocks, combining AI technology with undervalued fundamentals, could be the perfect destination.

What You Can Do Today

If you’ve been riding the AI wave and enjoying the gains (congratulations, by the way!), this might be a good time to take some profits and look for your next opportunity.

Consider rotating some of that capital into biotech stocks that offer:

• Exposure to AI-driven drug discovery
• Reasonable valuations (forward P/E ratios under 20)
• Established revenue streams (not just speculative early-stage companies)
• Strong balance sheets to fund continued research

The companies that are already commercializing AI-powered drug development (think established names integrating machine learning into their pipelines) could offer the best combination of growth potential and downside protection.

Markets are always evolving. The winners of yesterday aren’t always the winners of tomorrow. And right now, we’re seeing clear signs that capital is rotating out of the highest-flying AI stocks and looking for new opportunities.

Biotech stocks that benefit from AI technology, trade at attractive valuations, and have real growth prospects could be the next big trade.

It’s not about abandoning the AI theme… it’s about following that theme to its next logical destination.

Over the next few weeks, I’ll be spending a good portion of my research time evaluating specific biotech stocks. And I’ll be using my best ideas for aggressive trades that should generate oversized gains in the next several weeks.

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