Fundamentals are Important, Price Trumps All

Fundamentals are Important, Price Trumps All

We focus on the technicals and the chart tends to tell the story, however we don't want to be ignorant towards fundamentals. You just have to realize that if your time frame is under 3 years, then fundamentals will be pretty useless to you. So let’s take a quick stroll down fundamentals lane so you get some of the basics. We will go over the Beta, 52 week range (not really fundamentals however good to know), P/E, EPS, and dividend yield to get you up to speed!

Beta is how volatile a particular stock is compared to the overall market, we refer to the market as the SPY (S&P 500). The SPY’s beta is always 1, and a stock with a beta less than 1 like Nike (NKE .50 beta) would in most cases be half as volatile as the market. Conversely if a stock has a beta of 1.5 like Tesla (TSLA), it would be 50% more volatile than the overall market. The higher the beta, the higher the risk however also the higher the reward! Example in a perfect world:

SPY finishes the session +1%

                                             Beta of 1.5 = +1.5%

                                             Beta of .5 = +.5%

The 52 week range, shows you the range the stock has traded in for the last year, the more expensive the stock, usually the bigger the range. For example Google’s range is almost $300 while Bank of America’s is only $4. If you were able to buy the low and sell the high of BAC in a year, your gain would be around $4 per share.

The bigger the range the better for us, if a name moves $4 a year even if we are perfect the upside is limited. This is where knowing the name you’re trading comes into play.

P/E is the share price divided by the earnings they bring in. As an investor in that stock, you don't physically get those earnings. A stock with a P/E around 12 tends to a stable company. The higher the P/E the higher the future growth potential the general public believes in the stock. For example there can be companies with P/Es as high as 100 and some as low as 5. As active traders the P/E is not that important, if you are looking at long term investments then companies with P/Es of around 10-15 tend to be a sweet spot. Lower P/Es are more value plays and those take too long to pan out in most cases.

Some stocks pay a dividend, some don't. If you are invested in a stock for 1 year for example, you will receive the dividend payout usually 4 times a year. Let's say you invested $1,000 in VZ which pays out around 5% a year, regardless of how it performed you would receive $50 in dividend payments throughout the year in total ($12.50 per quarter). The rule of 72 is good to remember, if you divide the dividend yield by 72 you will know how many years it will take for your investment to double from the dividends compounding. For VZ it would take 14.5 years for your investment to double off of the 5% payout. We look at dividends as the sprinkles on top of a sundae, they are never the reason to get into a trade however they can be an added bonus. Dividends also add stability to a stock (aka they tend to be less volatile) however with less volatility that protection comes at a price. The price is, that dividend paying stocks tend to move a tad bit slower than their non paying growth brothers.

In the most simple sense think of dividend paying stocks as “value” stocks and non dividend paying stocks as “growth” stocks.  

Trade strong sectors

As a trader or investor, the price, beta, 52 week range, P/E, EPS and dividend all matter. However what trumps all is your price. You could buy the best company in the world yet if you bought it at all time highs and the stock never trades higher you will still lose money.

Do you have balls?

What is the P/E ratio of a stock that is trading at $20 and brings in $2 a year in earnings?

What is the P/E ratio of a stock that is trading at $100 and brings in $2 a year in earnings?

Which stock are you most bullish on?

What would be your stop? Why that price?



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