The Timing Of Fundamentals | Podcast Episode #415

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Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance.

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Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

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You can succeed at the stock market and I’m ready to show you how. Hey, everybody, this is Ryan Mallory with shareplanner.com’s Swing Trading the Stock Market and

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today’s episode, we’re going to be digging into a little bit of fundamentals, one particular metric that we’re going to be focused on and we’re going to be talking about how that aligns with timing trades.

0:46
And just when the fundamentals of a stock or a company, I guess is probably the better way to say it, when the fundamentals of a company lines up as a good investment, does that necessarily mean you take the investment now or do you wait?

0:59
So that’s what we’re gonna talk about here today. And the cool thing is, is this question comes from a guy who’s from my hometown. I don’t usually get too many of those. So that’s pretty cool. And instead of using his real name, I’m gonna give him a good old Florida redneck name of Jamie Cole. And I can verify for you that that is a Florida name and it can be a redneck name too. So Jamie Cole is the Florida Redneck name we’re going with today to conceal the identity of the person writing this e-mail because 10 years from now they probably, you know they’ll probably cancel me or whatever for saying something that I’ve said on this podcast in the past and and so they’ll probably not like want to be associated with the podcast. So in essence I conceal everybody’s identity.

1:42
So Jamie Cole writes Ryan what’s up boyi and and I say boyi like that because he actually says Bo. I I and I have 210 age boys that I’ve heard them actually say boyi like that and they’ll tell you it has an eye on it. But this guy actually goes a step further adds to I. So Ryan, what’s up boy? So I’m writing you all the way from the far stretches of Melbourne, FL. I have been wanting to write in for a while, but honestly I’ve never really had a question. However, tonight after a long discussion with ChatGPT and differing points of view at the end, I figured I would get your thoughts. Before that though, I’ll give you a little bit of background on my trading.

2:20
I started about four years ago and didn’t know that much. As before this I worked as a firefighter and then got into welding. Anyways, I enjoy to mostly buy stocks for long term appreciation and dividends for cash. I trade options, nothing too wild. I use the wheel strategy which is I sell slightly out of the money puts to collect the premium and if I get assigned shares at expiration, I sell out of the money calls. I sell the calls until the trade as a whole becomes profitable again and then I sell the calls at the money or in the money in order to get rid of the shares. I’m sure you know the deal. It’s a common strategy and seems to work. I’ve been doing this full time now for a few months. OK, we got a full time trader on our hands.

3:03
So earlier I was looking at formulas for different metrics to judge a stock price. I am trying to get better at valuing a stock price. Any tips are appreciated. I started looking at equity value per share. I noticed that sometimes that can be a good way to evaluate a stock price and here is the formula for equity value per share. Equity value per share equals the enterprise value divided by the shares outstanding. Now I was looking at how the enterprise value is found and how it can affect the equity value per share. I’m using market cap plus debt minus cash equals your enterprise value. Using those fundamentals I noticed that if everything stayed the same except in one scenario, the amount of cash is more let’s say double than that what it is in the other scenario. Then you can get a lower number or a lower equity value per share.

4:00
So say in one scenario the equation is like this market cap plus debt minus cash equals enterprise value or for example $100 plus $50.00 minus 25 dollars equals 125. The 100 being the market cap, the debt being 50, cash being 25 that equals 125. Now scenario two is 100 plus 50 minus 75 equals 75 enterprise value. Now to make it simple, use 10 for shares outstanding and you would get an equity value per share of 12.5 for the first example and 7.5 for the second scenario. If you equate those two share price, it makes it look like the company or scenario with less cash should have a higher share price. I would think that the company with more cash should have a higher share price if everything else were the same. The varying results make it appear as though the scenario or company with less cash would have a higher share price because you end up with a higher equity value per share than the number or price.

4:48
I know that this probably is a lot to take in and I hope that I wrote it out in a way that makes sense. You did. I think sometimes it can be hard to talk about that on the podcast just because if you’re throwing out numbers and everything, either they’re writing it all down or or whatever, but we’ll talk about that in a second. He goes on the right. He says, I guess my question is, well, first, does it all make sense? Second, am I missing something? ChatGPT kept saying that the numbers would be the same and kept referencing market cap. I feel like I have all the formulas right and that this is just an example that shows that all metrics or ways to evaluate a stock are not 100% and This is why you should use multiple ways to evaluate a stock price. Then use all that data to come to a conclusion. I’m not really sure what it all means, but I thought it might be a good topic or might lead to another topic to discuss. All right. I apologize for the ridiculousness of this e-mail. It wasn’t ridiculous, but there’s not too many people you can talk about this stuff with. I don’t drink much at all these days, but I usually would go for a Jameson. Not sure if you have your medical card or not, but have you ever considered doing a nug review? Keep up the good work, Jamie Cole.

6:02
Holy cow. A nug review. No, I don’t think I’d do a nug review. Yeah, I don’t think I would. No, I mean, I don’t think you could do that, man. Oh, my gosh. No. No, I’m just laughing out about it. It kind of caught me off guard reading that. Would I ever do a nug review? No, definitely not. You can look what up a nug is on Google if you don’t know what that is. But it’s kind of funny, though, that he asked me that. Hey, doesn’t hurt to ask, right?

6:30
So there’s a lot to unpack on this particular e-mail. It was a long e-mail too, but I like that. I like the long emails ’cause I get a better understanding of who the person is and what, you know their situation is and what they’re trying to convey. So one of the first things that stands out, I don’t get a ton of full time traders that write into the show. Maybe they’re too busy trading. I don’t know. I mean, but I think it’s kind of cool when you do get it. Most of the time it’s people aspiring to become a full time trader or trying to make more money off of it from a part time standpoint. But here you have a person who it seems like he’s just doing one particular strategy. Yes, he has long term stocks in his account. He also has a dividend account set aside as well.

7:09
So he’s making some money from the dividends. He was also letting his long term stuff grow, Probably not, you know making any money on that, you know, on a daily basis for supporting himself as a full time trader. But the dividends can provide it depending on how much money you have in your dividend account can provide some income as long as you’re not reinvesting that money. But what probably stands out to me is the biggest area where he’s gaining the money for his trading account is through this option strategy that he’s using. It’s a it’s a wheel strategy. I’ve heard of it before. Essentially he’s selling out of the money puts. In his case, he says he’s selling slightly out of the money puts to collect a premium and if he gets a sign this year. So essentially, like let’s say a stock is trading at $100 and he sells puts for.

7:55
He’s not buying puts, he’s selling puts. So he’s selling them to somebody who’s willing to bet that the stock’s going down. He’s essentially saying that the stock’s not going to go down, or at least it’s not going to go down enough to hit his puts. But if it does, let’s say he sells puts at $90.00 and it goes down to $85. Let’s just make it easier. Let’s say it goes down to $80.00. Well then he’s going to be assigned those puts at $90.00. So he’s essentially down $10 right out of the gate. In order to make up for that loss, he’s now selling covered calls against the shares that he was assigned at expiration. So we call these cash secure puts. Most of the time, brokerages are going to want you to have cash secure puts.

8:41
Now you’ve heard the the whole idea that most of the time options expire worthless, right? If you’re buying out of the money ones at least. So in this case he’s selling puts out of the money to collect that premium. So if he’s selling options at like a couple bucks per share, he’s collecting those times 100, let’s say you know each share he’s he’s selling puts for is like 2 bucks. OK, so then you know he’s collecting $200 for this particular strategy. As long as the stock doesn’t drop below $90.00, he’s not gonna be assigned the shares. So there’s a premium to hear that he’s collecting.

9:16
Now, I’ll also say this too, I don’t consider myself an options expert. I don’t even necessarily consider myself like an expert with all the jargon that they use. But I do know enough about options. I’ve traded options in the past. I’m somewhat comfortable about talking about it. And then if the option that he sells goes against him and he gets assigned the shares, he’s sitting on a loss. In this case that we get, you know, we say that OK, it went from $100, he sold the premium at 90, the stock goes from 100 below 90 and he gets to sign the shares, you know, when it closes out at 80, but he’s got a trade price of $90.00.

9:51
So what does he do in order to get that money back? He starts selling covered calls against that position. He continues to sell covered calls against that position until he gets back to break even. And so also I tried to simplify the example that I gave, but now in this scenario, he sounds like he’s only doing slightly out of the money calls. So he’s collecting a bit much bigger premium because it’s so close to the current share price. So there’s a little bit more risk that goes along with it because the really, you know, goes wild. Let’s say there’s an earnings call and it drops 20%. He’s gonna be starting from a pretty big hole. So then trying to sell the calls against that position, he’s gonna be probably be doing it for a while to be able to make that money back and then if it, you know, if it’s calls that he’s selling against the position that goes into the money, he’s he’s going to lose those shares and he’s gonna be taking a loss.

10:39
So there’s there’s some risk. Every option strategy has risks. So it’s not like going into this, you know you’re not taking on some risk because you are. You just, if the market’s going down, probably not the best time to be using that strategy because there’s a higher chance that you’re going to be assigned those shares from the from the puts that you’re selling. On the flip side, if you get assigned in and the market’s going down, selling calls is is a much better environment to to be trying to make your money back in when the market’s falling than when the market’s like scorching higher because there’s a good chance of your calls that you’re sold they’re gonna expire in the in the money.

11:13
So it goes both ways. There’s challenges in either a bullish or a bearish market that you’re gonna have with that strategy. But overall, I think the strategy works better in a bull market than it would in a bear market because ultimately your goal is to not even have to deal with the calls. It’s just to continue to collect premiums on the puts that you’re selling out of the money.

11:26
Now the next part of this e-mail, he gets into enterprise value per share and he’s trying to basically try to figure out a different metric to judge a stock price. By now equity value per share is essentially the market cap plus debt minus cash. He’s ask them why in the world do you subtract cash because that essentially gives it a a smaller enterprise per share. Well the EV enterprise value that’s really something that you use for taking over a company. And the reason why they subtract the cash is because it reduces the cost of acquiring the company.

12:04
Because what’s being assumed in that formula is that the company who’s buying out the other company is going to use that cash that they acquire to immediately pay off the takeover price. And it could be used, I don’t know, to to buy back debt if they want to, but that cash is gonna get used. And so that’s what they’re trying to figure out is how much enterprise value does this company have. And so they subtract the cash as a result because that’s cash is just going to be used to to reduce the cost of the takeover.

12:30
So do I necessarily think that that has a good value for determining if a stock’s a good long term buy? Not really. And I don’t think it’s worth getting too hung up on a fact that a stock would have a lower enterprise value because it has cash. Because I really think that what that particular equation is trying to measure is the takeover value of that company.

12:53
But what I would tell you as well is to not be discouraged by the fact that maybe I don’t think it leads to anywhere, doesn’t mean that it can’t be used in some other way to determine, you know, long term value in a company. However, long term value that you find in a company doesn’t always lead to immediate success.

13:12
So often times people will do screens of companies that have like a certain PE value or that they have, you know, certain amounts of cash on hand for wedding out stocks in their screens. But usually that doesn’t matter much when it comes to technicals and when it comes to swing trading. Because when we’re looking to trade stocks from a swing trading standpoint, we’re looking for a stock to break out, bounce, you know, get rejected at a resistance level. Breakthrough A resistance level, but we’re looking for something to happen at key technical levels and the now not months down the road.

13:44
And when I think of some stocks that have had really good fundamentals, one of them comes to mind is Micron MU had like a PE ratio of like 3 or 4 for a long time like crazy low. I don’t think I’ve ever seen another stock with that kind of a low PE. Now it’s gone parabolic over the, you know the whole AI craze. But before then it was a really low priced stock, but it had good fundamentals. Some people may argue differently, but I mean, I think a lot of stuff in trading is subjective, but my subjective opinion is that it was pretty good, but yet it stayed very low for a long time.

14:22
And if you found Micron, it’s like holy cow, this stock has everything going for it and it’s at a great deal. OK, you might buy it from a swing trading standpoint, but it ain’t gonna do nothing for you. For a long time it it took a catalyst in the market to really break it out. But from a swing trading standpoint, especially the way that I approach swing trading where I won’t hold a stock through earnings, you really have about 3 months for a stock at at its best. That means if you bought it the day after earnings, you’d have about 3 months for a stock to do its thing. If you buy it, you know halfway through 1/4, then you have like 1 1/2 months for it to do its thing. That’s swing trading because you’re trying to reduce the risk by trying to play earnings. Doesn’t make much sense to do that from a swing trading standpoint.

15:01
So the timing may not line up in the case of like MU never really lined up. So if you’re trying to trade based off of like enterprise value or something and I don’t really think enterprise value is something that’s all that great beyond what it’s really specifically used for and that’s for you know acquisitions, you may be sitting on that stock forever for somebody to finally notice what you’d notice. But in the meantime if you’re trying to like avoid earnings, you might have to sell it before the earnings report comes out.

15:26
And another thing, even if you find a stock that has really good fundamentals, you want to be cognizant of the overall market conditions. So for me, I don’t do a lot of long term investing. I do do it and it and it’s something that I think is important, but I’m not building up new positions all the time. I’m not buying all the time. What I’m usually waiting for is for conditions to go really sour in the market and something that we don’t always see even every year, sometimes there’s a couple years that can go by and there’s just nothing that really gave me the opportunity to get long on a on a new investment. And so it requires a lot of patience.

16:05
But when things do go sour, like what we saw in 2022 and 2022 is the last time I really aggressively added to long term positions was we’re like Amazon, Apple, NVIDIA companies that we know that are good companies and you don’t even really have to do a lot of fundamental analysis on them, but you just know that they’re good companies. Like somebody says, is Apple a good company or a bad company? Now, you may not like iPhones, you may not like the iPad or, God knows, I don’t think anybody likes vision. That little headset thing that they put on you, isn’t that called Vision or Vision Pro? Nobody likes that thing. But overall, is Apple a good company? Yes. Is Amazon a good company? Yeah, everybody uses Amazon.

16:41
I use Amazon. I got a harmonica the other day. I don’t know if I needed a harmonica, but I enjoy playing the piano. And I was, I was like feeling for a moment, I was like maybe I could do some Billy Joel and play the harmonica. Probably won’t work, but I bought a harmonica, you know, I mean, I bought it off of Amazon. It’s there the next day. Who else can really do that? Not many companies.

16:58
So there’s a lot of companies that we know are really, really good and they have great fundamentals. But then when there’s a market recession or there’s a huge market sell off, say the market drops 30%, you think those companies are just going to hang in there and not take a beating at all? No, they’re going to take a beating. And so what I like to do is not really try to go after these very speculative companies. I don’t do that at all. What I wait for is for these good companies to get way underpriced, to get way knocked down and for me to do it when conditions are at their worst.

17:27
The last time we had some really bad conditions, October of 2022. Before that it was June of 2022 and those are some really optimal times to add to your long term positions. And so fundamental investing doesn’t have to be hard. That’s why there’s a lot of 401K millionaires out there because they just add to it every week. And that’s definitely an approach that’s proven to be pretty good over the years. But I don’t necessarily think it’s the best approach and so I do like to do a little bit of timing or technical analysis with my long term positions too.

17:56
And I use the T2108 for indicator for instance, which measures the percentage of stocks trading above their forty day moving average. And when it gets into those single digits that is where I’m looking to build long term positions. So we may not see that for another couple years, I don’t know depending on what the market does, we may see it six months from now. But when that happens, that’s where I’m looking to build new long term positions or add the existing ones. And then when the market goes on that next run, if the stocks are doubling or if they’re tripling, some of them did from the 2022 lows until now, whatever they’re doing, you know I’ll start to raise cash on some of those positions, keep a core position, but also have some cash on hand too to be able to buy on the next drop.

18:33
So even good metrics on stocks, stocks with great balance sheets won’t result in great gains if it’s a bad market. So if we’re in a market that’s selling off, we’re not hitting extremes, but we’re kind of like go back to 2022 again. You’re in, you know, like February, March time period of the sell off or if you go to like .com bubble, you’re in the 2000, 2001 time period of the .com bubble. Does it make sense to be buying good companies when the sell off is just getting started? No, it’s better to wait for the extremes because then there’s a real inherent value in those companies because they’ve been unfairly sold off. They’re way below the value that they should be trading at.

19:12
And if you don’t believe me, go back and look at where Google was trading at and Amazon was trading at in October of 2022. Look at AMD, look at NVIDIA, look where Caterpillar and Home Depot and Walmart. It’s good to look at those companies and see where they’re at and see what the value would have been if you would have bought them there.

19:34
So Jamie Cole good question. I had to actually read this e-mail a couple of times cause like you, I mean, I know it’s kind of hard to listen to equations over a podcast episode, but you know, trying to make sure that I understand exactly what he’s asking too can be kind of difficult when you’re getting into the mathematics of, you know, evaluating a company.

19:51
But in all, you don’t have to make fundamental analysis too difficult. A lot of it’s gonna come down to, especially from a long term standpoint, as the conditions in which you get into those stocks and the opportunities that you seize for getting into those stocks. There’s a lot of good companies out there that are trading at share prices that are pretty much fairly in line or a little bit above what their price should be, but they still they have good balance sheets. They’re fundamentally solid companies. But it doesn’t necessarily mean it’s a good time to be getting into those companies.

20:27
And so the opportunity that you wanna look for is when the share price has dropped so much. But the fundamentals of the company still very sound. They’re still a very good company like what we were talking about Apple, Amazon, Google, Netflix. I mean, those companies are gonna be around right? For, for as at least from what I know at this point in time, I don’t have any reason to believe that they’re going anywhere. But it kind of goes back to what Warren Buffett was saying. I mean, he’s saying a lot of things, but one of the most popular things that he says is, you know, be fearful when others are greedy and be greedy when others are fearful. When the markets are at their worst, that’s when you got to be a little bit greedy.

20:54
And a lot of people try to take that saying and put it into the short term. You know, the market sells off to, you know, 100 points on the S&P 500. Like, oh, this is the time to be greedy. You got to be greedy when everybody’s, he’s more talking like long term here, like when you’re reaching some major, major sell offs at the end of major sell offs. And you know, there’s technical indicators that can help you determine that. I just told you mine. But those are the times to be greedy. Those are the times to start building positions.

21:23
You don’t have to do it all at once. You don’t have to go say, OK, I’m putting $100,000 down on this position or $10,000 on this position. No, you can build that position over time because you’re not going to get it right at the bottom, but you can get pretty close to it by averaging in over a specific period of time.

21:39
You enjoyed this podcast episode. I would encourage you to leave me a five star review if you haven’t done so yet. I really appreciate you doing that. For those who have already done it, thank you. Thank you for doing that. It really does mean the world to me. And I do read them. Keep sending me your questions. ryan@shareplanner.com And I I didn’t even go do a plug. I got so lost in this episode I forgot that you can plug swingtradingthestockmarket.com.

21:56
I don’t even know what I’m doing sometimes. swingtradingthestockmarket.com. That’s going to give you all my stock market research each and every day. From daily watch lists where I’m giving you all the different stocks that I’m watching each and every day to a watch list review. In the afternoon I’m going to go over the watch list, tell you what I thought worked out good, what didn’t work out good, what I’m looking for and the stock based off of current price action. And I’m going to do big tech updates with you. Plus stock market updates. Lots of videos, man. It’s really good. Good values. Check it out. swingtradingthestockmarket.com Send me your emails ryan@shareplanner.com Tell me your stories. Tell me what your background, what is bothering you. Thank you guys and God bless.

22:34
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23:06
If you have any questions, please feel free to e-mail me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.