The Only Fundamental Analysis Video You Will Ever Need... (Full Course: Beginner to Advanced)

hey you're here because you're seeing stocks move up you're hearing it on Twitter or on TV or your friends are talking about it and you want to make money with the right stocks and do your due diligence so you don't lose money and also be prepared to find Bargains when as you know the market will evitably sell off well the best way to get into stocks is through fundamental analysis or understanding the financial strengths of a business now I myself have lost thousands and thousands of dollars from using what's called technical analysis or studying prices that leads to trading and chasing price trends Warren Buffett has always said that the best way to make a lot of money in stocks is just to buy a great business at a good price and the way to do that is with fundamental analysis and so this is everything that I wish I knew before coming from 10 years of Wall Street Experience I was a research analyst at Bank of Montreal an investment Bank in New York and my clients were funds like JP Morgan and Citadel and I was helping them pick stocks for their portfolios so in this video I'm packing everything you need to know about fundamental analysis to make a good investment decision we're talking financial statements screening companies valuation forecasting identifying opportunities and even options and last but most importantly the psychology of buying and selling in the market so that you can identify good versus bad companies know what price to buy them at and when to buy and sell them this will save you from making all the same mistakes that I've made from Trading and instead make good investment decisions with fundamental analysis and become a better investor does that sound good so here's a list of everything that you'll learn and let's Jump Right In okay so now the psychology of price and earning so fundamental analysis is all about the study of businesses to understand their value is about the business and its earnings so earnings is just how much money the business makes after paying all its costs and when we buy a share of a stock we're buying a share of the business so the earnings per share is the value that we get as investors so here I'm pulling up a chart and this is from kin it's an online tool that I like to use I've pulled up the earnings per share and the price per share now if you can when you're using software like this is to use the next 12 months earnings per share estimate or NTM for short and this is what I have up here and the reason why is because markets tend to look ahead so the earnings estimate will actually give you a clearer sense of how prices are moving with earnings but if not historical earnings per share is fine so here we have a chart of apple and the black line over here is the uh earnings per share and then the green line over here is the price per share of the business so what do you notice the price follows the earnings per share so price follows earnings as a lot of investors say now here we have Nvidia it's a little bit more volatile you see that the earnings are more cyclical you got these Peaks and trops but overall it still follows uh the earnings now here we have Tesla so it's obviously a lot more volatile we see these big changes in earnings and much bigger changes in price so there's also big divergences between price and earnings per share now fundamental analysis is all about understanding the black line so the business's earnings and then using that to Value the price per share so that's the green line over here when we can do those things effectively we can figure out what stocks to buy and sell and at what price and when to buy them so instead of buying a business when it's on decline we want to buy it when it's improving so like right right over here and instead of buying Peak prices over here we probably want to buy them when they're at better value maybe over here or around here and so what most people do when they skip fundamental analysis is the following it's what I like to call the face and prey strategy they they follow markets really obsessively they'll start chasing price trends or popular stocks and then ultimately buy them at Peaks and inevitably as you know price comes down and then they hold it just praying it will recover because at the end of the day they don't really know what they bought so what's actually happening here is that's a momentum strategy you're just buying prices that go up and so what happens if you just keep doing that as a strategy you get one or two years of gains and then usually get about two to three years of pain because those expensive stocks ultimately will revalue and if you try to hold on that actually doesn't make it work because the strategy if you actually just keep selling losers and keep rotating to the prices that are going up you this is the how the strategy would actually perform if you were to do what most people do and just pray and and hold on to the losers what your portfolio is going to do is just go down like this so the fundamental strategy kind of flips it on its head what we our focus on doing is buying good businesses that grow earnings we're going to Value those businesses so that we get it at a good price and then ultimately we let the market work for us you let the price work for you so what that looks like is we're first buying shares that are growing earnings so like at a point like here we're going to Value the shares so we don't buy it at Peaks like over here and ultimately as we follow with the business and understand its valuation we want to get it at a good price like over here so when we do this the Market just works for us the price goes up as a business makes money and grows in value now what you don't need and this is addressing some popular misconception you definitely don't need to be day trading 90% of trading is algorithmic trading computers just do that type of strategy better you don't need to be an accountant I myself started with a Philosophy degree you just need to know the essentials and you don't need Insider information that's highly illegal especially in the US markets you will go to jail and finally fin you don't need a lot of money it really comes down to good thinking I've seen myself that you don't actually get much Advantage at all it's technically a disadvantages when you have a ton of money to invest so if fundamental analysis is all about the business's earnings then the foundation is the financial statements and there are three key things that you must understand with financial statements that make you money as an investor of the business the first is the growth of its earnings second is the margins so the efficiency of the business and third is the returns so the Returns on invested Capital you're going to see exactly why all those things work together when we actually build up a financial statement here's a lesson of why this is important so back in around 2017 I bought this dumb stock and I probably lost over $110,000 buying it it was right Aid and the reason is I didn't bother reading the financial statements and I just bought it because a hedge fund was buying and the stock just obviously went down like this if I had looked at the financial statements ahead of time knowing what I know now and this is r a's financial statements I could have seen the warning signs so by the end of this as well you'll be able to see the exact warning signs so that you can avoid mistakes like this but first we got to understand what those numbers actually mean and don't worry this is not going to be a long list of boring metrics what we're going to do is Imagine we're building up a coffee shop together so you're going to we're going to build up the numbers of a coffee shop from the bottoms up as if we started the business together and so then you know exact ly what these Financial numbers are how they're linked together and we're going to analyze them so that you can see exactly what makes you money as an investor the first thing when we start a business is we need to raise money we need to raise Capital so let's say we each put in $500 to start up the business say we each get 10 shares that works out to about a total of 10 shares at $100 each we put that in exchange for shares of the business so that's the stock and now that's considered Equity because it's money in invested in the business now let's say we also go to the bank we want to get a loan we get a $100 loan at a 10% interest rate from a bank now that would be considered debt on our balance sheet so that works out to a total of $100 in liabilities so that's something that the business owes and it's money to be paid back so the total Capital here is 1,000 in equity plus 100 in liability so the total Capital invested is $1,100 now with this Capital we want to invest in assets for the business we want to get a a cash register we want to get a shop store all the furniture Etc so let's uh put that all together and say we've invested 800 in property and Equipment now these are assets these are stuff that we own and we expect to make money from it and we also keep $300 in cash in the bank for the business just for day-to-day uh cash needs whether that's for payroll or for expenses so our total assets comes up to 1,100 now you can see that we we have a total assets of $1,100 and that has been funded by $100 in liabilities from debt and a th000 in equity so assets from a balance sheet perspective always have to be funded by either liabilities or equity and they always balance and that's why it's called a balance sheet so now what that we're funded let's go into business now we want to start to think about the operating metrics for our business and let's look at this for the first year let's say we sell cups with we we sold about 150 cups for the year and we've sold them at a certain price of $5 a cup so when we multiply the cup sold times the price per cup that gets us to $750 in sales now we got to pay for the actual coffee so we have to pay for the beans we have to pay for the actual cups say that works out to about $3 in uh cost per cup now we multiply the cup sold by the cost per cup that gets us to What's called the cost of goods sold or the cogs for short now from the perspective of expenses operating expenses for the business we have staff and labor costs works out to about $100 uh in that first year our equipment has worn down a little bit Let's uh quantify that as about $80 in depreciation works out to about 10% of the asset value and so then that total of labor cost plus the depreciation or the wear and tear of our equipment gets us to Total operating expenses of about 180 and so this is the basis for our business performance now we can take that operating metric and start to see it in the income statement and this will show us how much earnings the business makes so we have our total sales that goes into the revenues for the business for the first year $750 we have our cost of good souls or cogs gets to $450 so when we take the revenues minus the cost of good soul that gets us to our gross profit so that's The Profit that our business is making before operating expenses you can think of it as a profit on the product before paying expenses for the business now from an operating perspective we have operating expenses we have depreciation the wear and tear of our equipment we also have the labor of course uh those things sum together gets us to uh a total operating expense of 180 when we take the gross profit minus the operating cost that gets us to our earnings before interest in taxes so that's ebit for short of $120 now of course we also have our interest expense remember we got a $100 loan we're paying 10% so it's $10 in interest that gets us to our pre-tax income of 110 and then we also pay taxes let's say we pay a 20% tax rate on that pre-tax income works out to about $22 in tax and then that leaves us with $88 in net income that's the earnings of the business and when we take into account the shares of the business that works out to 8.8 in earnings per share now this is the most important number because that earnings belongs to us as shareholders that's the money the business has made which will increase its value all right now let's look at from a a cash flow perspective so this is a cash flow statement it can tell us uh from a cash perspective how the money is moving around starting off with the cash from uh operations we have our earnings so we've made $88 in net income uh we have our depreciation of $80 so that's just a non-cash expense right because it's the wear and tear of equipment so we add that back and that gets us to the actual cash produced by the business the cash from operations is $168 in the first year now from an investing standpoint we've invested $800 into our property equipment when we first started the business that's year zero and let's say that we also want to uh reinvest $80 to to offset that wear and tear so we fix any equipment uh that has broken down think of it like maintenance so when we add those things together we get our a cash that's in from an investing stand now when we take the cash from our business and minus the Investments we get to what we call free cash flow now that's the cash that the business has produced after Investments and so that works out to $88 you can see it's 800 a negative 8800 because of the Investments when we first started it up and it's called free cash flow and it's important because this is the cash that our business has that can be used to uh either pay a dividend to us as shareholders or maybe to repurchase stock effectively it means that we can pay ourselves as shareholders with free cash flow now from a financing perspective we've raised $100 in debt we've also raised $11,000 in equity from selling our shares the total is ,00 from last year but we haven't done any financing this year so we don't have anything from year one now what happens when we put all those things together we got our cash from operations our cash from investing and our cash from financing we sum all those things up together we can see the net change in cash you can see that's how we ended up with $300 in the when we first started the business that's why we have $300 in our bank account and our business generated $88 in the first year in net cash and it's the same as earnings uh because you can see that our investments are just balanced with dep the depreciation it's just there to offset the depreciation we didn't make any additional Investments so we take our beginning cash we take our net cash and then that ends us with the uh end cash for the period so we started out with $300 and that's how we end up with 388 at the end of year 1 and now we can look at it from a balance sheet perspective this basically just records where our money goes so this is what we started off with when we first started the business this is our first balance sheet remember we didn't raise any Equity Capital so we still have a th000 in uh total Equity capital and we've generated $88 in earnings let's say we keep that into the business that would be considered retain earnings just reinvested into the business we also have $100 in debt we didn't pay off any debt no change to debt and we also have still $800 in property and equipment we had that depreciation of $80 but we reinvested $80 in capital expens ures so there's no change to our property and Equipment when we add the additional cash of $88 we end with 388 in cash so now we have total assets of 1,188 liabilities are still 100 and so then our total Equity is 1,088 so you can see that the assets have gone up by $88 and then the equity has also gone up by $88 because the liabilities have stayed the same so Equity is sometimes called Book value and that has increased by $88 so that's the value of the business from an accounting perspective that's why it's called the the book value and it's sort of like net worth from an accounting perspective so it's increased by $88 so now let's think about the returns that we made on our investment as investors so we raised $1,000 in equity Capital plus the $100 in debt works out to 1,100 in total capital Capal now the business has made $88 in earnings so as a percentage of the equity Capital raise that works out to an 88.8% of return on Equity now if we want to think about the returns that the business has made for all capital holders we want to look at the earnings before interest and tax because interest is paid to the debt holders or the bank right and we still want to pay tax so we take the earnings before interest in tax then deduct the tax that gets us to $996 in earnings before interest in tax after tax on the $1,100 in total Capital now that works out to 88.7% in return on total Capital so you can also see that because we borrowed some Capital it means we as Equity investors have used less Capital with the same amount of earnings that's why we have a higher return on our Equity now looking at it from a book value perspective we started out with a $1,000 Book value now with the $88 in earnings the book value has increased to $1,088 again the assets minus liabilities equals the book value of the business from an an accounting standpoint and then the book value per share we just divided by the number of shares has increased from 100 to 109 so that works out to about a 9% increase in the value of the business for us as shareholders assuming that the business retains its earnings so I'd say that's a a pretty good return for our investment in the business just just for our first year 9% is pretty good if you think about what you get as a bank it's probably about 3 or 4% treasury bonds might get four to 5% but of course we're not just operating for one year the nice thing about a business is that we can start to find more customers and make more money for us as investors so let's see how this changes if we grow the business over the next 5 years so starting with our growth assumptions let's say we grow our cup sales at 10% every year that works out to 10% every year and now we can uh estim IM at the number of cups that we sold let's say that we grow our prices at about 2% a year that works out to inflation and then that gets us of course to our sales we take the cup sold times the price per cup that gets us to our total sales uh forecast now from a cost perspective let's say our cost of goods sold or cogs increase also about 2% so the same with inflation so all of our cups and our beans work out to increase at about that same inflation rate so our cost per cup go up by that amount we can work out the cost of good sold by the cup sold times the cost per cup gets us to our estimated cost of goods sold now we look at a from an operating perspective let's say labor costs and wages go up about 5% a year we use that to estimate the total operating expenses of labor costs going up notice also that our Labor uh expenses are growing not as fast as sales it's growing at 5% versus the 10% in cups and 2% in price so we're also getting more efficient in our business and we're getting more bang per buck as they say like a lever and that's why it's called operating leverage when you can grow your sales faster than your operating expenses if you want to do some quick math you can see that our operating expenses have increased by about 20% whereas if you look at our total sales have increased you know about 50% so you can see that's the leverage that we get we're getting 50% in sales versus just 20% in operating expenses so now we can put this all together into the new income statement showing the trends of the the business going forward there's no change to interest we haven't raised any more debt no change to depreciation because we maintain the same level of property and Equipment the Investments balance with the depreciation and of course shares remain the same as well so no change in debt no change in depreciation no change in shares and then so now we have our new revenues we have our new cost of goods sold and that gets us to our new gross profit uh forecast for the future remove the labor so the total operating expenses and that helps uh uh calculate the earnings before interest and taxes we have our interest minus that gets us to our pre tax income and of course same tax rate 20% now we have our tax expense and that gets us to our net income and of course our earnings per share uh for the business so the point is now you can see that by the end of year five now we expect to generate 21 in earnings or about 21 a share by year five and so this is is how earnings are calculated in a business and that really is a foundation of financial statements that believe it or not is everything you need to start analyzing a business okay so now let's switch gears to analyze the financial statements to evaluate the performance of the business as an owner and see what really makes us money so we start off by analyzing the trends in the income statement and we want to be focused on the drivers of earnings in other words what makes us money uh for the business so we start off with Revenue growth just look at the current year as a percentage from the prior year so that works out to about 12% a year in growth you can see that we have 10% growth in cup volume and 2% price so 10 plus 2 gets us to our Revenue growth and that tells us that the business is growing we can look at gross margins so we take the gross profit as a percentage of revenues that's stable at 40% per year you can see the reason why is because the price per cup and the cost per cup are both stable they're both increasing at about 2% a year so that tells us that the profits on the product are stable we can look at ebit margin so earnings before interest in taxes as a percentage of revenues now that has increased from 16% to 20 23% now what that tells us is that the business is getting more efficient because the costs are relatively fixed we know that the revenues are growing faster than expenses if you remember labor costs are just growing at about 5% a year because revenues are growing faster than expenses we get operating leverage what operating leverage does is really it increases the rate of growth of earnings so if we look at EPS growth the earnings per share growth current year as a percentage of Prior year we we see that earnings per share is growing much faster it's growing at about 24% per year so that tells us that the business is making lots of money and then from a balance sheet perspective again we're looking at this to see where all the money has gone now we know that there's no additional Equity raises so then that's why this stock level has stayed the same we know that there's also no additional debt raises so that's why debt has stayed the same and earnings if we assume have been retained into the business it's just added up into the balance sheet now this is a cumulative sum so earnings are just added up to the prior year sum so that we can see that the business has generated a total of 700 and 29 in earnings for the business now there hasn't been any additional investments in property equipment so property equipment as a line item has stayed the same and therefore all the Investments or all the earnings excuse me have grown as cash and that's why cash has grown by that same amount so when we look at the book value you can see that it's grown from a little over thousand to 1,729 which comes from all the earnings that the business has generated so the value has increased increas because of those earnings and now we can put that all together to again see the returns that we get on our invested Capital so if we assume that all the retain earnings are just paid to us as shareholders we don't have any additional capital investment and either Equity so that stays the same or debt so total Capital has stayed the same we can see that the Returns on Equity so just the earnings of the business as a percentage of the equity Capital continues to increase right because we're growing more earn earnings on the same amount of capital and that works out to a higher return on equity and it's the same thing for the return on invested Capital which is the earnings before interest in tax after the tax as a percentage of total Capital you can see that both return in equity and return on total Capital have been increasing so that tells us the business is making more efficient use of capital that's why it's getting higher and higher returns now that's an indicator that the business is really making good money now let's see what all of that does to the value of the business business so let's start off with the book value so the equity again it's just the assets minus the liabilities think of it as a net worth from an accounting perspective that has increased from 1,000 to 1,729 book value because the earnings has increased and so the book value per share has also increased from 109 to 173 per share you can see that's all the earnings that have just been added up in the business and because we're getting higher Returns on the capital that leads to a larger increase in Book value book value is starting to grow at a faster and faster rate because it's generating more earnings and we can also see that from the cash perspective our cash per share is now 103 as well so if you think about it we put down 100 per share if we uh gave back all the cash to us as investors we would have made back everything that we've invested that $100 if we distributed all of our earnings back to shareholders now from a cash flow perspective we can look at the trends to see where the Investments and where the cash has been generated over time we know that there has been any no equity raises so there's nothing happening there no debt raises so also nothing happening in the financing uh side of things the business has been generating uh an increase in net income and depreciation is stable because the uh assets have been kept level and we have a stable depreciation of assets so we can see that cash from operations has been growing as well now from an investing standpoint we've reinvested to maintain the property equipment so we've reinvested that same amount of depreciation into Capital expenditures those are the Investments and works out to a total of our investing activities again we take the cash from operations from the business minus the capital expenditures and then that gets us to our free cash flow and you can see that our free cash flow is growing as well we're generating 21 in free cash flow by year five which as is the same as the earnings because the Investments have been balanced with the depreciation so because there haven't been any new Investments depreciation and capital expenditure is balanced you can see that free cash flow and earnings are growing at the same Pace okay so now let's get back to the most important question how much money did we make as investors so we've put down $1,000 in equity Capital as shareholders and now over the next 5 years let's think about the returns that we get as investors so the business has been generating earnings and it's generated a total of 7 $29 in earnings if we pay that all to ourselves that translates into a 73% total return on our investment now if we assume that the earnings are just kept in the business so we retain it the book value of the business has increased also by 729 so the book value has increased to 1,729 now from a growth in value perspective that translates into an annual return of about 12% every year we can also think about it from an earnings perspective so the business is now making 211 by year five in earnings or $21 a share and relative to that $1,000 that we've invested that works out to a yield of 21% you can think of that as like an income so those are the three different types of ways that we made money on our invested Capital One is from growing earnings second is from the earnings growing business value and finally those earnings give us a yield or an income and so that's a pretty good business right those are really great return numbers and so when you tie that all together these are the things that make us as investors money it's really the growth and earnings so that comes from the sales growth the margins are the improved efficiency of the business that generates more and more earnings from the sales and then finally the returns or the efficiency of how the business is using Capital will generate more earnings from the same Capital invested if the returns are increasing and all those three things work together to grow the value of the business and make us money as shareholders all right so now let's apply this analysis and look at the trends in r a's financial statements so if we look at the income statement of the business over here we can look at the earnings so let's look at the net income and we can see that it's been going down and if we look at the earnings per share we can see that been going down as well and it's now zero so earnings have been going down there's a decline in earnings and there's just no earnings per share so that means that the business is not making any money now if we look at the assets so over here we'll look at the balance sheet so the assets about 7 billion that goes to 11.6 billion so we can see that the assets have nearly doubled the debt has also increased as well so that's gone from 6 billion oops I actually marked that but it's a little over 7 billion so looks like they took out more debt the number of shares have also increased over here which means they've raised Equity so they've sold stock and so when we put that all together that means there's an increase in assets and it's been funded by an increase in debt and an increase in shares so they've raised a lot more capital for their Investments now when we look at the cash flow perspective so all this is the cash to think about where is this money going what are the returns that they're getting from these Investments if we look at just the cash flow from operations you can see that that has just been going down pretty dramatically just 225 million in cash flow if we want to look at the free cash flow so we got the capex over here you can do some quick math right so we have 800 minus about 382 so a little under 500 million in free cash flow whereas we look in the latest year it's about -200 in free cash flow so what that means is that the business is not is is one having a decline in cash flow and also having a decline in free cash flow so there's negative free cash flow so the business is not making any cash from its Investments and that makes sense with the earnings statement because the business is not making any earnings so with no growth in earnings we see that decline in efficiency because they're not generating earnings so margins are now negative it's not growing earnings and returns are now negative that's why the business value starts to go down and eventually the business went bankrupt uh because it ultimately ran out of money because it had no cash flow to pay the interest on its debt so when a company can't pay interest on its debt it gets bankrupt and the debt holders take over the company so that's a key to reading and analyzing financial statements remember it's just the growth the margins and the returns and we can start to apply this to start to screen good versus bad companies and that's what we're going to do in the next [Music] section now the key to start screening companies and there's about 3,000 stocks in the US market obviously more internationally you want to start to separate good versus bad companies and to put your money where it's going to grow and that's where the fundamental research comes in the key to fundamental research is to figure out what's changing in the business itself and in the industry and once you figure out which businesses are making money and which businesses are not and understanding why that's how you can screen good versus bad companies now to show you this let's compare two businesses we got Kroger on the left and they sell uh grocery stuff so food vegetables meat food products so forth and then Walgreens on the right they there's the pharmacy business they sell drugs that doctors prescribe now there's similar businesses they both serve retail so they have similar customers and even from a stock perspective so this is between 2015 and 2019 can see that they basically performed in line Kroger is the blue line over here Walgreens is the purple line and Kroger is up slightly it's up 2.5% and Walgreens is down 2.5% over uh this time period now from 2020 onwards one of them went up more than 140% and the other one is down 80% and so now we're going to look through these two companies and you're going to see the signs that indicated which would perform better than the other so let's start with the financial statements here we got these two financial statements of these two companies and we're looking at the past three years from 2017 to 2019 the same period that we're looking in the chart just before so what do we notice when we Compare the numbers remember we're just looking for uh growth overall margin Trends and and returns if we look at uh sales you can see that Kroger is going from 115 to 121 Walgreens 118 to 120 so Kroger's is just growing sales slightly better if we look at gross margin so 23 to 23 looks like they're stable if we look at Walgreens 25% gross margin goes to 23% so wal Green's gross margin has gone down that means Walgreens products are making less profit here we have IAS so IA is just like we were looking at before earnings before interest and taxes but it's also removing the depreciation and amortization and we do that because those are one non-cash charges and they're related to Investments so it just makes it easier to compare companies with different levels of Investments if we look at Kroger we can see there's a slight decline in ebit margins whereas Walgreens is stable so that tells us that Walgreens seems to be somehow offsetting that gross margin impact with the uh ebit da margin there's something changing in margins that we should be looking into but if we look at earnings overall you can see that Kroger's earnings are going up pretty nicely whereas Walgreens is basically flat it's just gone down a little bit and from an earnings per share perspective Walgreens has grown from two to about uh 370 and earnings per share walls Walgreens has gone down from 378 or it's gone up and it's gone up just barely to $413 so Kroger is growing earnings a little bit better you can see it's grown by almost $1.70 whereas Walgreens is just grown by about 30 cents or so because earnings is the most important thing Kroger's earning earnings so that should get us an indicator that something is going on that we should look into now when we look at the return perspective now we want to start thinking about what the companies are doing with their Investments we can see that Kroger's returns have been declining a little bit so a return on total Capital has declined a little bit and what that probably is if we look at capital expenditure we see this big jump in capital expenditure so big jump in capital expenditure might explain the reason that they've invested more Capital that's why the returns have gone down but if we look at free uh return on Equity that seems to be going up so something to paying attention to and also when we look at uh the cash from operations that's pretty stable and from a free cas perspective it looks like it's going up a lot so that's a generally positive sign that they're making cash on their investment so again something to start to pay attention to when we look at Walgreens we see the returns are also stable cash flow however is declining a little bit and we see that the capital expenditures is increased a little bit but when we look at the free cash flow on a per share basis free cash flow has been going down and even though they're investing a lot L money they are not making money from their Investments and so there's something clearly going on Walgreens is not growing earnings or or even cash flow while Kroger is growing earnings and cash flow and also making some kind of investment so that gives us a big clue of what's going on so then we need to figure out what's happening what's changing in these businesses and what's changing in the industry because once we understand these trends of who's actually making money and why we can start to make a good uh decision of where to invest now this is where fundamental research comes in what we're doing is searching for the answer to the question of why is Walgreens not growing earnings and why is Kroger growing earnings and research pretty much looks like this we can start to look at the 10K filings that's the company's annual reports want to pay attention to the risk section the business and industry and management discussion and Analysis that's MDMA uh mdna MDMA is different we look at company transcripts so that's earning calls conference transcripts and Industry presentation ations as well as industry reports [Music] [Music] and so you do a little reading and usually it just pops out as long as you have a good question in mind with some searching we can start to see why Walgreens margins have been going down so at the bottom over here we see this is pulled out from their risk section one of the key risks that they face is reduction and third-party reimbursement levels so it turns out that these lower reimbursement levels is a risk and the reason why that is if you do a little reading in the 10K is that pharmacies in the US are actually reimbursed by these third-party payers they don't actually make money from selling the drugs they make money from getting reimbursements when they sell drugs the second thing this is also in the risk section that they are seeing a pharmacy shift mix shift to lower margin plans and this comes from these 90day subscriptions which have a lower reimbursement rate and that rate has been going down which explains why they're seeing pressure on their gross margins because they make make less profits on their products and this is also from a transcript from their earnings call where the management is saying we expect fairly continued pressure from reimbursement on a long-term time Horizon so management is very clearly saying that they expect pressure and reimbursement it's a long-term Trend in the industry and that explains why they're having lower margins which also explains why they're not generating as much earnings it's it's declining now when you search around you can also start to find industry articles so this this is a crazy one that Pharmacy fees have increased 91,000 per. this is also an indicator that the industry is is quite pressured for pharmacies they're the the those thirdparty payers are also placing additional fees ones so this pressure is quite well known this is just from a a news article explaining these fees so this explains why Walgreens is facing pressure on its earnings even though its revenues are growing and it's because of these lower reimbursement rates and higher fees being placed on now when we contrast it to Kroger so this is from their investor presentation in 2019 because we're looking at understanding what they're doing with their Investments and it looks like they're doing a lot of different things this explains why they've been investing a lot so they're doing cost savings they have this alternative profit streams which turns out to be that they're growing these new marketing and finance businesses they've also called out this gross margin pressure in retail pharmacy so they see it as well but from a strategic perspective it looks like they're focusing ing on Fresh so fresh food and so this explains that they're doing a lot of Investments they're strategically changing the business and when we look also into transcripts of conferences and earnings calls just to understand what's going on we use some keywords we can see that fresh departments have higher gross margins we can also see that they have these alternative profits businesses just searching around for margin keywords and also have higher margins and that fresh offering is an important sales driver so what this tells us is that fresh is helping sales fresh has higher gross margins and alternative profits have higher margins overall so it's clear that all these Investments to sum it up is positioning Kroger into higher margin stuff and that probably explains why they're making more in earnings and cash flow from those Investments so when we compare Kroger and walgrees now with our research we can see a number of clear Trends one is that Kroger has better sales growth because they are investing in fresh produce while in contrast Walgreens has lower reimbursements for pharmacies and that explains why Kroger is generally growing sales better versus Walgreens there's also this clear shift to higher to margin products we got fresh alternative profit businesses versus mg greens has been shifting to lower margin products these low reimbursement rate prescriptions now that explains why Kroger has relatively stable gross margins while Walgreens has declining gross margins on Wall Street we would say that there's a mix shift going on Kroger is Shifting to higher margin businesses Walgreens is Shifting the lower margin businesses and that at a high level explains why Walgreens is growing earnings while uh uh sorry Kroger is growing earnings while Walgreens is not growing their earnings so when we go back to our chart knowing that what we know now is the same time period which company do you think is more likely to make money meaning which one should we invest in give you a guess I would probably say let's buy Kroger and maybe sell Walgreens and let's see what happens in the financials so this is for the next uh four years played out from 2020 to 2023 so as the financials happen we can see the trends we can see that Kroger's revenues have continue to grow 122 to 148 while as uh Walgreens has grown as well but just at a at a slower rate now Kroger's gross margins are down slightly so 23% to 22% so seeing pressures and gross margins whereas Walgreens is down almost 2% so 200 basis points basis points is just 1/ 100th of a percent so Walgreens is facing more pressure on its gross margin you can see that's because of those reimbursement rate pressure that they disclosed before now Kroger's ebit da margin is actually improving it's gone from 4% to 5% now that's probably because they've shifted the business to higher margin businesses as a whole the freshh the alternative stuff whereas Walgreens has actually their profit been cut in half that's huge their profit margins have gone from 4% 2% and that explains why Kroger's IA has expanded nicely whereas Walgreens has contracted from 4 billion down to 3 billion and that's why Kroger's earnings are growing as a whole minus this slight contraction period in 2022 whereas Walgreens their earnings have grown slightly but eventually have started to contract and if we look into what actually gone on happened in 2023 it looks like this big decline was also because Walgreen had to pay a pretty big fine for selling opioid drugs in the US so that made it worse put that together it seems like this boost in Walgreens EPS was likely temporary whereas Kroger seems to have a more sustainable way of growing their earnings another clue from a Walgreens perspective and when we see this increase in EPS but we don't see it in the EA in the actual earnings if it doesn't match up it means something's going on it's probably just temporary now I would say based off these Financial Trends it's clear that Kroger's business is probably doing better when we look at the returns and free cash flow to see how their Investments are doing you can see that Kroger's returns are now improving as a result of their Investments they're generating more earnings so returns are improving cash flow is stable and and free cash flow is actually trending upward so that's great there's this brief contraction period looks like over here in 20123 looks like they also had this big increase in Investments so but if they're making these Investments and they're actually generating earnings so it should lead to better returns over time even with this contraction now if we contrast this to Walgreens Walgreens has a very clear decline in the Returns on Capital it's basically zero at this point cash flow has gone down to have and even though they've picked up their Investments they're not generating any earnings and free cash flow is also declining as well so you can see very clearly that Walgreens is having trouble generating cash it's having trouble generating earnings and the Investments that they're making just don't seem to be making any returns and so what do you think would happen to the value of these businesses well let's look at from those 2020 onward matching that per time period of financials we see that Walgreens has basically just gone down with earnings and that's why it's dropped 80% you can see the green line is the stock price the black line is the earnings per share and you can see that has just gone downwards remember price follows earnings now if we look at Kroger you can see that the price has gone up and it's gone up about 100% And with the stock just giving a brief pause at this period when there was this contraction in earnings in 2023 so knowing what we know now that they're making Investments that are generating earnings and that might just be a temporary contraction that was actually a good point to start buying the stock so there is some judgment in making an opinion on whether or not that Contra uh contraction was temporary and since it was you can see that the price recovered and so did the earnings so let's compare the performance together we put on a pair trade at 2020 we went long or buy Kroger and we went short Walgreens or sell Walgreens and Kroger is up almost 150% from that time frame and Kroger or sorry Walgreens is down over 80% so this would be considered a pair trade once we identified a good versus bad company and this is what a lot of stock picking hedge funds do like Citadel to make money and so you can see that's a value when we do this fundamental research we can see what's changing and quite clearly see what's a good business and what's a bad business so the key to screening out good versus bad companies with fundamental analysis is really to just to understand what's changing both in the business and the industry so you use the financial statements to as a first indicator then you start to do the research and look for the change right you look for the trends and growth margins and returns then it becomes very clear from the research and that's how you start to look to buy companies with growing returns and growing earnings and sell or short meaning sell short the bad companies so now that you pick a can pick a company the question is how do I know it's the right price and so that's the next section we're going to talk all about valuing [Music] companies okay so now that we've analyzed the fundamentals of the company let's figure out what price do we pay for the stock and now that's the valuation and here's why valuation really matters if you don't pay attention to valuation you might buy something like this so this is a company light speed and if you had bought at any point Point any point in 2020 to 2023 you would lose money especially of course if you bought it around here from those Peaks the stock was down 80% which is what we don't want and I know because I lost money on this dumb stock because I actually did buy it around here when I was thinking valuations didn't matter so I'm going to show you how you can avoid that Mistakes by learning valuation and it's going to become very clear why light speed's price didn't work and how you can start to buy a stock at the right price that will actually make you money so to explain valuation let's do a quick rewind and go back to our simple coffee shop to value that okay so these are our coffee shop financials these are the three-year financials by the end of year five and they're presented just like you would see any other company in its filings and so now the question that we should ask ourselves is what price do we think we can sell the coffee shop at now let's think about this logically by year five the cash value is the ,29 so that's probably the lowest price that we can sell it at it's basically selling it for free for the amount of cash that we have or we could look at something like the book value so the total Equity right remember it's just the assets minus the liabilities so the book value of the company on the balance sheet that's about 1,729 so we could just sell it for the value of its assets minus its liabilities or we could do something based off its earnings we know that it's generating 211 in earnings or 21.1 in per in earnings per share or also the the free cash flow is also 211 as well so maybe some kind of multiple on that assuming it can make that every year and we also want to take into account the fact that this business is still growing you can see that the business is both growing in terms of revenues and margins have actually been increasing so the business is also getting more efficient so that should be worth something as well and so what we would do in real life if we were selling this companies we'd hire an investment banker their job is to sell companies and the first thing a banker will do is actually look at how similar companies are priced in the market so the banker would put together a list of similar coffee shops and so that we can look at how they're trading on the stock market to see how their Shares are valued so here are the companies we have the list of these comparable companies and we have the price per share as well as the earnings per share now to get a sense of the price we can also look at the price as a multiple to the earnings per share so that would be the price to earning multiple metric and that's a very common valuation metric we can also look at the growth estimate for these companies for the next couple years and the banker will point out a couple key things we'll say that the market price for these coffee shops is anywhere between 20 and 23 times earnings and the multiples are actually higher when growth is higher and that's very common with a lot of companies everyone loves Buffett Buffett's coffee shop and so that's why Buffett actually trades at a premium relative to its growth now to normalize for growth we can look at the PEG ratio so we can look at the price to earnings multiple relative to the growth estimate and when we calculate the PEG ratio it becomes a little clearer that they're anywhere between 1.3 to 1.5 Peg that's the value of these shares we can then look at the median of the group to get a sense of what is the basically the middle of the line of what investors will pay for the business and that gives us an indication that investors will probably pay uh 23 times earnings for a coffee shop or about a 1.4 Peg and that reflects the current market price for coffee companies so there's two key things you need to do to value a business for its Market valuation first is to have a good earnings forecast so understanding the growth for the future and two is to have comparable multiples so be able to price those earnings using the right peer multiples and those two things indicate the price that the market will pay for the business so what we'll do is we'll get together our managers to put together our projections for our coffee shop so these are the growth projections or growth assumptions that would underly any Financial forecasts we have our sales so we expect say 10% of cup sales in growth per year because the market for coffee is expanding where our coffee shop is we expect about 2% a year to grow with inflation and we also expect our product or unit cost to also grow at about 2% inflation rate as well now we also have our expenses we expect labor costs to continue to grow 5% every year again it's above uh inflation but it's still below our expected Revenue growth rate or sales growth rate we're going to actually need some Investments to expand now and we expect that we'll have to grow Investments at probably the same rate of revenues so about 12% remember we have 10% in uh sales cups and 2% price so that would add up to 12% so that's basically the assumptions of how earnings forecasts are built so we can put that all together into a model these are our growth assumptions we expect cup sales to grow about 10% every year that gets us to our expectation for cup sold we expect price increases of about 2% per year so that's the price per cup and then when we multiply of course the cup sold times the price per cup that gets us to our expected sales from a cogs perspective or cost of goods sold we expect the cost per cup to increase about 2% every year when we multiply the cost per cup times the cup sold that gets us to our cogs or cost of goods sold forecast our labor expense we incre expect a 5% increase per year that's our wages and then that gets us to our total operating expense forecast before investments from an investing standpoint we think that we're actually going to need to start to build out the coffee shop in order to get more of these customers so what we're doing doing is we're investing we're adding Capital expenditures or caps into the business that those are the Investments we decided we're going to grow Investments with revenues so let's say we keep capex as a percentage of revenues at about 7% so a fixed uh percentage and so that allows our capex to grow with revenues so we take our beginning property equipment we add our capex and we also need to forecast our wear and tear of equipment so we expect it also to decrease by about 10% every year that's just the wear and tear or depreciation and that gets us to our dollar amount of depreciation that we expect now to work out our total assets at the end it's pretty simple we just take our beginning property equipment we add the capex and then we minus the expected depreciation that gets us to our end forecast of property equipment which reflects the growth in our assets from our investments now we can then put all these assumptions together into an income statement to start to see the business's expected earnings and growth so we have our revenue forecast and we expect to grow at about uh 12% every year just is 10% in cups 2% in price pretty simple we minus the cost of goods sold that gets us to a gross profit we minus the depreciation and notice that depreciation is now going up because we are making additional Investments we reduce it by the labor expense and then that gets us to our earnings before interest and taxes we can calculate our margins now so our ebit margins it's just the earnings before interest in taxes as a percentage of revenues can also see that it's still expanding because we're still getting more efficient because our labor costs are growing uh slower same debt level so interest expense rate Remains the Same that gets us to our pre- tax income and we're using the same tax rate of about 20% so our tax expense increases as we grow pre-tax income and that gets us to our earnings net income or earnings for the business we don't have any change in equity we're not raising any more shares so same share count and then that's how we can calculate our earnings per share that we expect for the business so we expect next year to the business to generate 25.3 in earnings per share and we can also calculate the earnings per share grow so we expect the business to grow at about 177% in earnings per share for the next 5 years so that's our earnings forecast for the business of how much money it will make so now let's get back to market prices so here we have our comparable companies these are the multiples or the price of similar coffee shops trading on the stock market now next year we know we're going to generate 25.3 in earnings per share we've estimated about 177% growth in earnings per share for the next 5 years and so let's use the PEG ratio or the price to earnings multiple relative to the growth estimate we know that 1.4 is the median Peg for similar coffee shops so we'll use that we'll take that 1.4 * 17 that gets us to an expected multiple of about 24 times we take that 24 times multiply that by the 25.3 in earnings per share and then that gets us to our expected value of 5 95.8 per share and that's the expected value of our coffee shop based on the earnings per share of 25.3 with a 24 times multiple so you can see that if we picked the right multiples and did our forecast correctly we can sell our coffee shop to the market at that price that's the estimated value of our shares and you can also notice at that $595 almost $600 is way higher than the 170 or so of Book value that our accountants tell us and this is why bankers get paid a lot more because they can help sell companies at market prices and usually much better better prices now we also know it's a good price because we know that investors are also getting a good deal so this is the returns they can expect if they buy the company at 59 5.8 so they put down 5,958 for 10 shares we know that the total earnings of the business is going to be 1,782 if all of those earnings are distributed to shareholders that represents about a 30% Total return from the earnings based on how the bus business is growing its earnings now of course the second way the investors can also make a return is say they decide to sell the business off at year 10 so by year 10 the coffee shops making about 472 in earnings from our previous forecast they also sell it at 24 times earnings they're going to sell it at 11,135 so if they sell it at that future market value they're getting about 13% in returns based off that growth in market value from the earnings and same way from a yield perspective the business is generating 472 by the end of year 10 and so that represent an 8% yield based off the capital put down of 5,958 so that represents the income from the investment so if we compare that to other investment options we can think about treasury yields are about 4.5 bonds are about five or six and cash is about 3% of the bank and so that income or the earnings yield perspective at 8% is a pretty good deal and from a growing value perspective so capital appreciation and we growing at 133% a year the stock market tends to appreciate at about a 10% rate per year and so that's actually a good return as well and ultimately everything comes down of course to earnings that's where all the values comes from and so if investors are getting a good deal versus other investment options that means that the business is most likely going to be sold at that price CU it's a good deal so that's how companies are actually pricing on the stock market and how investors actually figure out if an investment is a good deal or not all right now let's go back to light speed so that was a company at the beginning of the section and let's see how this company was valued right at its peak around September 2021 so we're going to use the same process that we did before we have our comparable companies over here we got wex corpay shift for payments these are all similar sized payment companies and they're smaller so they're not generating a lot of earnings at the time so what we're going to do was use the FY 2026 earnings forecast so the next 5 years to price the companies FY just means fiscal year so the company's reporting year we also have our long-term growth estimate over here and then the median works out to about a 10 times multiple on the FY 2026 estimates with the 15% growth estimate median or a 7 Peg now with all that said just to give you a sense of how extreme light speeds valuation let's take a look at light speed so at its peak of $120 a share that $120 a share represented a 3,000 times multiple on a 04 earnings per share for FY 2026 as an estimate or an 85.7 Peg so even though the company is growing a lot faster than all these other companies at 35% it really just was way too expensive now to put it in another way if you bought it at one 20 per share that 0.4 EPS needs to grow by about 300 times just to get to the same valuation of the group of about 10 times so what do you think would happen if you bought it at that $120 price well you lose almost all your money light speed stock declined over 80% and yeah maybe the business slowed down a little bit but the business is really doing fine now you might notice if you're paying mentioned that all the valuations came down so between this time period of 2022 a lot of companies were trading at quite high valuations and grow slowed down a little bit in 2022 so valuations came down so you might think okay what if I just bought around here right at the end of 2022 would I still make money let's take a look so at the end of 2022 so September one year later we'll use the same process with the same comps except now we're going to use FY 2027 estimates so for the next 5 years the long-term growth hasn't really changed that much and you can see valuations have come down they're now at a six times multiple on a 5-year estimate on a 15% growth rate translates into a 4times peg now let's look at what light speed looks at so light speed even at this 18.6 which is down 80% light speed is still 35 times so it's still five times more expensive than the group and also notice that shiftwise and or shift for and corpe are trading at 0.2 to point4 Peg so that's pretty low because a lot of companies if they're good companies tend to trade around one so that's actually a great price assuming the estimates and the growth are correct so what happens if you buy at these prices both light speed and core pay and shift for payments let's take a look so what happens if you buy it at that point well at least with light speed you stop losing money right but your stock is still down 4% so you still don't make money even though you bought the dip and so this is why you don't just buy dips on stocks without knowing the valuation now let's look at those other two let's look at coray and Shift 4 you can see both of those returns are up more than 100% so they're both up more than double and you can start to see the power in doing this right by understanding the earnings forecast and how to Value these companies the market will give you real opportunities to multiply your money so the keys to valuing a business is one having a good earnings forecast of what the future earnings of the business looks like and that's how the market values companies second is having a good multiple so the comparable multiples of how similar companies are priced relative to their future earnings you get those two things right and you'll find Opportunities to make money so how about let's see all this in action see a real forecast and valuation of a public company so you can see what it looks [Music] like so we're going to forecast Paylocity it's this software company they provide payroll and HR or human resource platform for small businesses and I like to use this company as a case study to mentor and teach investors because it's a simple business to understand so by the end of this once you understand forecasting and then valuation you're going to see exactly why this was an expensive price for Paylocity and where you don't want to buy and why this is actually a cheap price for the stock and where you do want to buy and I'm going to discourage you now from Trading prices when if you're looking to learn to invest because if we take a purely price or technical driven view that discipline would inform you to one look for the trend and then you want to sell when the trend breaks so you would sell over here and then it would teach you to start looking at support levels and resistance levels and teach you to start buying around here selling here buying here and selling here and so what happens if you learn to just value a business correctly you can figure out these areas like here and here as major price areas that are considered cheap and expensive ahead of time so it really avoids you having to spend all this time trading back and forth and that's why I believe that valuing businesses is just much more powerful when you're looking at long-term investing so here's the past fouryear Financial statement from 2020 to 2023 for payasi that we use as a base to forecast and value that stock most people when you ask them why they buy a stock they might say something like well I like the Starbucks brand and I drink coffee there when really you should be thinking what is my forecast of the company because if I asked you how much money do you think you can make next year you'd probably say well I'm in charge of Business Development if my business can hit these sales targets I can probably get this kind of payout for my contract now that's the exact kind of mentality that you should think about when investing in a company if you're giving them your money you should at least think what is the business going to do to make me money as an investor now the keys to good forecasting is to get three important things reasonably correct one is sales growth two is margins and three is capital Investments notice these are the exact same things that we use to analyze financial statements is because they ultimately help us forecast pass the earnings the key to getting the sales growth rate is getting a base rate now what that is is you want to be looking for some kind of reference otherwise you're just making it up or you have to trust someone else's forecast a base rate can come from a number of places you can look at the market growth rate you can look at the growth rate of its peers you can look at the Historical growth rate to get a sense of the trends you can also look at the company's Target so what you do is you want to start high level and then start honing in and it's really important to get the sales growth number right because everything flows from there and you'll see when we do the forecast and it all comes down to guess from doing good fundamental research [Music] [Music] so let's start by looking at the numbers that we got first is the growth of the market so this is a forecast from an industry report on the human Capital Management market so that's the market that Paylocity is a part of they forecast this Market to grow at a kager or compound annual growth rate of about 9% for the next few years so that's the market growth rate then we want to zoom in a little bit so then we want to look at the peers so these are the comparable companies these are similar payroll and human resource companies over here you can see there's obviously a big range of growth rates so we can start by looking at the median and so the sales growth rate tends to range between anywhere from 10 to uh 22% and pelocity up over here we can see 10 to grow at a lot faster rate so it's a faster growing company than some of its peers but we can see that it at times can also grow at around the market rate of its peers like it did in 2021 then we want to zoom in again to the company itself so this is from an investor presentation of pity's own Financial targets we can see that they target around a 20% plus Revenue growth rate this is back in 2023 here's a forecast model for pelocity and here's how it's built it's just the same way as when we forecasted a coffee shop based on the cups and the number of Cups sold and the price per cup with pelocity they sign on businesses so that's the client count they're they charge based off the number of employees so we have the average employees per clients or the client size that works out to the total amount of client employees that they're charging and then there's a price or a revenue per client employee and then that gets us to our total revenue forecast so then we can work out the three major forecasts that we're going to do which is the revenue per client employee the average client size and the number of clients that they have which of course gets us to the client employees now we're going to work backwards a little bit starting off with the price forecast so just put in a 2% Revenue per employee so about the same as inflation when I look at the average client employee guys there was this big jump in 2023 now it turns out that was actually a one-time thing when they shifted to bigger clients the prior year but that shouldn't recur so we keep that stable so 0% so basically we're just modeling or forecasting based off the growth in the number of clients that they have so the peers from a revenue perspective are growing between 10 to 20 so if we take the middle is about 15% and minus the two and maybe another 1% from other Revenue stuff that gets us to about 12% or so and so that's how I got to the 12% in the number of clients and of course when we multiply that by the average employee size plus the 2% price increase that's how we get to that 14% Revenue growth rate now of course that's below the 20% Target that they're that they have forecasted for themselves and that's because they make money in some other ways which I've excluded here just to keep it simple they make money from interest from withholding payroll for taxes and that adds generally between 3 to 4% so the total revenue forecast is about 17 or 18% in Revenue growth and it's slightly under the 20% Target but I'm not trying to get too crazy here right I'm trying to just want to make a base forecast so when we look at margins the key is to understand how the business grows is expenses as it expands and so that's where you pay pay attention to the cost structure of the business and you get a sense of that by reading the 10K filings as well as the transcripts when the company gives presentations to investors so here we can look at both the historical margin Trends over here as well as their long-term targets so we can get a sense of how pelocity margins change as it grows so the first thing that's apparent is that when you have stronger growth you tend to get higher margins you can see that when we have this acceleration and revenue growth you get a big jump in say ebit down margins and same with the gross profit margins and the reason why that is is because the business as it sells more products to the same customers there's usually not a lot of additional costs to implement their software which is why when we look over on the right at their long-term targets you can see that their long-term targets for both gross profit margins as well as eiton margins are a lot higher than the the current margin levels which indicates that's how their long-term targets are incorporating that expected margin expansion because that's how the business will grow we can also see over here for modeling purposes the specific cost items that they expect based on a target of a percentage of revenues and you can also see basically the trend has already been happening we get that 68% 28% gross profit margins evit down margins going up to 69 32 so it's approaching their targets of 75 to 80% gross margins and 35 to 40% in EIT down margins so here's my forecast model for the margin side again the assumptions are in yellow we have our gross margins over here and then for the operating margin I have the individual cost expenses so I'm just estimating that as a percentage of revenues and then using that to estimate the operating margin so let's take it one at a time so the gross margin just basically forecast it to expand a little bit so we're going from 68 to about 69 right it's assumption that they're get more profits as they sell new products now on the expense side you'll notice that it's pretty much basically the general and administrative that is going up to 17.8 and that's based off the current Year's guidance of what they expect and I expect that to decline a little bit as a percentage of revenues to 17.5 so that decline means they're getting more efficient at using general and administrative expenses when we look at the research and development and sales and marketing basically I'm just keeping them unchanged because they need to use both of these expenses sales and marketing and research and development to expand their business so no change as a percentage of revenues so when I put all those operating expenses together the model that is calculating how much total operating expense that sums up to when we remove that from the revenues we get our operating income and I can calculate the operating margin over here so a very slight increase in operating margins that's what the forecast here and again this 2024 base here is slightly lower than 2023 because they've already given a forecast or specific guidance of what they expect in 2024 so I used that as the base level now from a capital use perspective what we're doing is we just want to figure out the Investments that are required to grow the business and usually you can find this when we look through the managements plan in places like the investor presentations so here as an example I've pulled out a transcript from one of the earnings calls research and development is a really important investment for Paylocity and here they've just said that they expect to keep research and development pretty consistent right in terms of an investment standpoint so we expect a pretty steady level of R&D investment so what they're saying is they want to keep their investments in research and development stable so that just means as they make new software they're going to sell it and they want to grow it with revenues now over here when they look at what we expense versus capitalize all they're saying is just some of it's going to be allocated to the income statement when it's an expense versus capitalize meaning they're put it on the balance sheet so again they're just saying that split is roughly consistent and stable so now here is our model for forecasting the Investments you can see that we have the research and development over here split up between the capitalized and the expense so capitalized just means it's an addition as an investment on the balance sheet so you can see this 52 million over here matches the addition over here so this is the addition to the software asset now to forecast the software asset you can see we have the asset value over here we're keeping it at 4% of revenues represents the additional investment into that software asset so then that is added to the prior year and then we just less the amortization which we have as an estimate here which just represents like a wear and tear of software and then that's how we get to our final uh estimate for the uh software asset going forward so that represents the capitalized portion of research and development so the expense portion of the research and development we already estimated that when we were looking at at the margins so the expenses of the business and so finally when we're looking at property and and Equipment over here so this is just like the office stuff that they have we're also going to keep the additions to property and Equipment which is just like Capital expenditures and we're going to keep it stable at about 2% revenues going forward and then we also minus the uh expected depreciation so also wear and tear we're just keeping it stable so you can see the additions to property and equipment are basically just growing in line with revenues just like the additions to the investments in software as an asset so those are all the Investments you can see also that when we add up the total research and development expenses and capitalized portion over here and we work it out as a percentage of Revenue we can see that as a whole research and development is stable as a percentage of Revenue so that's how we're modeling the Investments growing as the business grows so we're keeping it very simple here so now we can put this all together into a model and there's going to be a little bit of tinkering and this is the financial magic of investing that goes behind the scenes [Music] it all comes together into an earnings statement forecast like this so let's see this built up so we have the recurring and other Revenue that's just our growth forecast for the Core Business there's this interest income on funds held for clients that's the other revenues so this is just the interest income that they get from withholding cash for payroll taxes for employers they get interest on that cash now that is going down because interest rates were really high in 2024 and so we expect that to decline but overall revenues are growing nicely we've also estimated the cost of goods sold with our gross margin forecast we can calculate the gross profit which is just the profit on the software product we can see that is also growing nicely as well and then we have our operating expenses we have our sales and marketing expense research and development General administrative and the operating expenses are just mostly growing with revenues they're using all of these to expand the business so the total operating expenses is growing as well so we take the gross profit minus the operating expenses and that gets us to our operating income or the earnings before interest and taxes and we can see also that the earnings before interest in taxes are also growing nicely as well then we got our other income there's no forecast C there minus that to get the income before income taxes or pre-tax income and then we minus the tax expense so estimating here a 21% corporate tax rate that's standard for the us and that gets us to the net income or the earnings of the business and that's most important and we have our diluted shares outstanding so diluted just means it's taking into account when they pay employees with stock options that increases the number of shares so you can see that the uh diluted shares outstanding is also forecasted to increase as well so then we put that together we get our earnings per share forecast and that's the earnings for us as shareholders now here's where some tinkering is going on the adjusted earnings the adjusted operating income because stock-based compensation is a non-cash expense right you're paying in stock and so even though it's in the operating expenses probably here and here it's a bit like raising equity because the employees are technically buying shares and if you want to do some quick math you can see that we have this 4 and 152 over here that implies about 250 million in stock-based compensation for 2024 and so we're adjusting that to remove the stock-based compensation and the reason for that is that gives us a cleaner look at the business earnings and same with the adjusted net income removing the stock based compensation and also the adjusted earnings per share is also removing stock-based compensation now this adjusted earnings per share is the most important for us these are the earnings that we get as shareholders that also accounts for the increase in shares and we don't use this regular EPS over here because it's double counting the stock based compensation it's both in the expenses somewhere in one of these expenses and it's also going into the shares as well so it's being double counted as an expense and in the shares and that's why we adjust it to the adjusted earnings per share so we're taking a few reasonable assumptions and turning that into an earnings forecast that's the output here we're estimating that uh pelocity will generate about 750 in earnings per share for fiscal 2026 and we're forecasting 2026 here is because at this uh year is when we expect the interest income to start normalizing to a regular growth Trend again we'll use this number to Value the company [Music] all right do I still got you I remember when I used to work in a research team when any of us would get locked into Excel we'd always come out of the office and just be like in a days and you know we'd always make fun of people be like ah you know she's got the Excel eyes and so I promise though that this will pay off with real money when you invest takes a little bit of work but now that we got our forecast let's value this company so the keys to making a good Market valuation we've covered we have a good earnings forecast so we just did that now let's get the right comparable multiples that's how we can value the company and get the right price so now let's bring up the multiples so just like with the coffee shop selling the coffee shop I've brought up the comparable companies these are all the major public payroll and human resource companies trading on the stock market on the top here we have the PE multiples or price to earnings multiples NTM just means next 12 months so the multiple the price is a multiple of the next 12 months earnings so we have a range of multiples from 2010 to 2023 so about 10 years this gives us an indication of what investors are willing to pay for similar companies in the past now there's already a big range in terms of the low median and high and so what's going on here if we just look at the multiples we can see that these payroll companies we got pay law City and paycom as well as these other companies over here seridian payor workday these are faster growing smaller companies so they have less earnings and because they're faster growing they have really high multiples we have our Cloud payroll providers here and these are the Enterprise Cloud payroll providers here and then that leaves ADP and paychecks over here and so you can notice that their valuations are actually a lot more stable because they're bigger they have stable earnings and they have more investors they have a tier valuation range now just so we can normalize all of this let's take a look at the the PEG ratio so that's just the price to earnings multiple relative to the growth estimate in order to normalize the price to earnings ratio we can see that if we look at ADP and paychecks that tightens up to one to about two and down here as a median it's .9 to 1.2 now when we look at it from a peg perspective we can see that actually ADP and paychecks actually get a premium valuation when we normalize for growth and again it's because they're larger they're more stable that tends to attract more stable investors so you get a more premium valuation now to hone in on the right multiple for pelocity I would say let's keep it fairly conservative keep it at maybe 25 to 30 times we don't want to give it a premium when ADP and paychecks of a premium so about 25 to 30 as a price to earnings multiple and then from a peg perspective I would say we can use a group's multiple 0.9 1.2 again we don't want to give it a premium but just give it in line with the group and we can use those multiples now to price our new pelocity earnings forecast so here's a summary of some valuation calculations let's just focus over here on the base so the base case is we forecasted 7.5 in earnings per share for FY 2026 and you can see that's reflecting from an earnings per share perspective of about 133% growth now I'm going to use a 25 multiple so that's at a low end of PE using the 80P paychecks range and 1.2 which is about middle of the line from a peg perspective when I take the average of those two methodologies of calculating the valuation so just the multiple times the earnings per share or the peg times the growth to get to the expected PE multiple and then applying that as well to the 7.5 earnings per share that's how I get these two valuation forecast and because they're slightly different I'm just going to take the average that works out to about $150 a share as a base case now the nice thing about using a forecast is now we can start to think of different scenarios so I have a bull case of 8.6 in earnings per share that represents a higher growth rate of about 18% and then from a base perspective 6.9 in earnings per share which is a lot slower in growth rate of about 8% so from the bull case perspective we use a higher multiple 31 times so that's the higher end of the range of the ADP paychecks range not at their Highs but a high from a median perspective and I'm going to use the higher group Peg so about 1.7 times and you can see actually here the price works out to about similar of about 270 per share now from a downside case now we're just looking at low multiples I'm going to got that 25 times is the lowest multiple that's been recorded for the group 0.9 is also a low Peg for the group group as well of course that's a pretty dramatic decline in price getting to a seven times multiple so honestly that is pretty low but again I'm just taking the average of those two so now I got an estimated bare case or downside case of 110 for the stock so now the nice thing is we have these valuation scenarios using different earnings forecasts now we know that the stock price should have a range of between 110 and 270 as a per share basis now there's a lot of different num going on so we can actually start to put this together into one value and to do that we can use probability so we use something that's called expected value really what we're doing is just basic mathematical concept of taking the expected gain or loss times the probability to get the expected value so what's going on is if we just apply an estimated probability to each scenario we can work out the expected value of these different price scenarios so we have our price over here of 150 that's the current price at the time we have our base scenario which was about 151 so that works out to about a dollar loss no big deal but let's say that works out to about a 16% 60% probability works out to netive -1 and expected value now for the upside we expect 269 and so the difference is at about A7 gain let's say that we have a 20% probability of that high growth scenario that works out to an expect value of 23 from the gain perspective now from the downside we have a 110 price that works out to a 42 loss multiply that by 20% probability gets us to an $8 expected value loss now you can see that all adds up to 100% probability so we've applied the probabilities to each different scenario now another way to look at this want to think about it from like a a gambling perspective is we can look at it from an odds ratio perspective so we have our expected gain before probability and our and our loss before the probability estimate and then that gives us a way to look at the win loss ratio so that ratio between 177 and 42 works out to a 2.8 win loss ratio that gives us a sense of risk reward that we can apply our probability estimate towards so to add all those things up together we add up the 23 the one and the and the minus 8 you add that to the 150 stock price that gets us to an expected value of 166 per share or 9% return so the value of doing all this is we've forecasted all the different scenarios for earnings as well as valuation and so now we have a real good sense of the potential price of the stock and while we can't predict the future because we've Incorporated probability and the different ranges that can occur this expected value assuming of course a probability in our forecasts are reasonably correct if that is a lot higher than the current price we are just more likely than not to make money so when you learn to value stocks correctly you'll start to understand stock prices a lot better you can see our scenario range over here we got 110 and 270 up here actually describes pelocity stock price really well for the past four years what that's telling us is that this level over here this 270 is and this 110 levels are expectations foray Lo City's earnings growth there was expected a very low growth around 2020 when the stock price was 110 and of course very high growth expectations in 2021 now but because pelocity never exceeded that optimistic scenario that we priced in to that 270 Mark which is why the stock price never went beyond that and likewise the stock price never even clums close to this area over here of 110 because the growth expectations never got even close to our very pessimistic scenario and so that 166 price level over here because it takes into account these different scenarios the price also doesn't really get below that level because it's the fair price so when it does trade below like over here and over over here because it's considered cheap the stock price is now trading below what the company is actually performing at it gets bought up by investors and that's how valuations work in the market and that's why valuation is really powerful so the best thing about doing good valuation work work is that now that we know that a good price at that point in time is 166 but buying at any point below would have been a good chance of making money and because now we know how to Value optimistic scenarios we know that prices basically when it gets anywhere close to that 270 level is probably too expensive so we it's it makes it less likely to make money and so that's the benefit of buying at good prices it means you can just sit back and wait and so as long as a company grows its earnings you make money and it truly becomes a passive way to multiply your money you really don't even need to look at the market price anymore if you've done good valuation work so what if we actually wanted to buy at spikes like here before this uptrend here or we want to just buy it before we get another Spike over here and it's likely going to keep going up here how do we actually identify those opportunities and we can if we start to really pay attention to Market expectations and that's when you can actually start to make some serious money and that's what we're going to cover in the next section have you ever noticed that sometimes a stock just all of a sudden the stock just starts popping off and the price just tis off right and you wish you could just catch that big move over here and ride that rocket chip which is honestly one of the best feelings in the world and so that's where we're putting everything in fundamental analysis together and I'm going to show you how you can catch these moves and here we're starting to really Crack the Code of stocks now we've covered the foundation which is one the fundamentals so understanding how to pick companies with growing earnings to its valuation estimating the price points to buy and sell the third layer on top of this is expectations so that's understanding how to identify change in Market expectations and we're going to cover that here because when you put all three things together they work together so that you can find Opportunities to make money pick stocks and this is what hedge funds do so let's go back to pity's price and earnings per share chart it's a reminder the black is the earnings per share and the green is the price per share so now there's this big disconnect over here right you see the earnings per share continues to go up whereas the price has been going downwards so what's going on here is that market expectations are changing the market does not see pelocity as a strong grower anymore in the future so one way you can check Market expectations is by looking at analyst estimates what these are are research analyst estimates of payo cities earnings per share so you can see we have fiscal 2025 fiscal 2026 and fiscal 2027 these are all forecasts of pay law cities earnings per share so what do you notice well they're all going down and so something changed in this time period in 2023 and again it looks like they're all picking up again so something also changed at the end of 2024 and you can see from the same time period of the stock chart you can see the stock price actually picked up on this earlier so right at the end of 2022 or about mid 2022 the stock price started to Trend downwards as well and so then the stock started to move down as estimates came down and the high point of course was our Peak valuation estimate so that decline in price came primarily from a decline in valuation this is the price to earnings multiple of pelocity stock you can see it's come way down and part of the reason of course why it's come down is because the starting point was very high this was a 95 times multiple and see the multiple has now come down to a more reasonable level of about 25 or 28 and so the question is why did the valuation come down so what we're going to do is we're going to put on our fundamental research hat again one more time and figure out by looking through the earnings calls and transcripts to figure out what's changing Market expectations so it becomes pretty clear that two things are changing in the payroll and HR space the first thing is that employment growth has been slowing of course when there's less employees overall it means that there's less revenues for payroll companies because they get they they charge based on the number of employees second is that there's been an end of IRS tax benefits so there was a lot of covid related employer tax benefits those were gone after a couple years so there's just less filings for payrolls to do payroll companies to do so that also means means less revenues so that just translated into into a slower growth in revenues which of course translates into a lower earnings estimate throughout 2023 and this of course was also confirmed by the company pelocity itself so this is from an earnings release in August 2024 they provide an outlook for their fiscal 2025 guidance so the upcoming year and now they expect revenues to grow at about 8% rate remember they were used to targeting 20% type growth rate so it's a much slower growth rate and so it's reflected in the company's Outlook itself and so that's the reason why analyst estimates came down you can see back in October 2023 they were expecting about $9 a share in EPS for 2026 that represents about a 30% growth rate year-over-year and then the new estimates in October 2024 they're expecting a $7 in earnings per share which reflects about an 8% growth rate so it's very similar to the new outlook for growth and the 2025 estimate of course was also lowered as well so now that you understand what's driving expectations you can then start to pay attention to the signs that could change these Market expectations so that's the signal so the key to finding opportunities from an expectation perspective is pretty simple all we're doing is just looking for change that's not priced into the market yet so one easy way is just to pay attention to what's going on with other companies now here's paychecks this is one of the larger companies in the space you can see starting around August 2024 the stock really started to come up and there's this big jump over here which was the earnings release you can see the stock price jumped and then just kept going up so what's going on is the market is starting to price something in the price moving up that is actually a pretty clear signal so what was going on when we look into the actual earnings release of paycheck we can see that one they reported pretty good earnings they reported $16 in EPS that was better than estimates for a114 so they beat by about 2 cents that just says the business is performing better than expected Revenue growth also accelerated from 7% from 5% in the prior quarter so that's an improvement in the growth rate and guidance is for 6 to 75% Revenue growth for fiscal 2025 also an acceleration from the prior year of about 5% so this is a very large company in the space what they're saying is that there's very clear signs of improving Revenue growth so this may be happening for other companies in the space as well now we can confirm this by looking at other data points this is the payroll numbers so this is the number employees employment in the us and we're looking at the year-over-year change so just looking at growth you can see it's been slowing all year from 2023 into 2024 but it looks like it's starting to stabilize so it's not going as steep the year-over-year trends seem to be stabilizing which indicates that maybe employment trends are actually getting better which of course would help payroll companies another way to check is to start just paying attention to what management is saying so this is a transcript of pelocity at a conference back in September of 2024 they're saying that they want to get back to a beat and raise Cadence what that means is they want to be able to beat analyst estimates and also raise their guidance or their Outlook that's what beaten rais means and they think that if we execute well allows us to do that based on the guidance that we provided so they basically are saying that we can probably beat estimates and raise our guidance they're saying that we can do better than what everyone is expecting and finally just looking at pity stock price itself so you can see around this time period as well pelocity stock price has also been trending up into their earnings release as well so the market is probably picking something up and again we know that the market can pick up things pretty fast so that's why it can be useful as a signal so we recognize a change that looks like Revenue growth is getting better than expected it might not be pric into the market so we can probably make money from this and that's where we get into the setup okay so the key to a good setup is to figure out what the market is pricing in and then pricing the new change and see what the market is missing we first have to estimate the change ourselves so here are the signals that we see one we see that employment growth is stabilizing two we see the headwinds are passing from the covid tax benefits it seems like growth is improving for payroll companies and third we see from the company himself saying that there's a potential raise in their guidance or their Outlook management is hinting at it so that all points to better Revenue growth so what we do is we just go back to our model and start to update our earnings forecast so this is updated for the 2024 actual so now we're forecasting earnings Beyond and say if we forecast some improvement instead of that 8% let's forecast 9% % for fiscal 2025 and we forecast a little bit of acceleration for the next couple years just showing what can happen if Trends start to improve so now we can forecast that pelocity might probably achieve $74 in earnings per share by fiscal 2026 and so we have stronger earnings growth then we can compare our forcasts to the current estimates to see if the market is pricing it in so this is the current an forecast in October 24 before the earnings release you can see that they're estimating about an 8% growth for fiscal 2026 now let's look at our new forecast based on our model we've estimated that it pay elocity could grow at about 11% so a slight raise $714 from the $6.95 that the analysts are expecting so we're expecting improving growth that's not reflected in the estimates so that's a sign that the market has not not yet priced in this change now it might not seem like much but this is enough to make money because stronger growth is definitely going to change Market expectation it'll bring them up which means a higher stock price and of course we got to Value it so let's go back to EV valuation perspective we have photies price to earnings multiple over here in the blue as well as some other their other peers we got paycom and we got ADP and paychecks over here so you can see that pelocity as well as paycom are both trading below the ADP and paychecks multiple pity is 27 versus 28 29 for ADP and paychecks so of course the valuation is reflecting a lower expectation for growth so now when you think about it pity's valuation is arguably cheap here it's trading at a discount number one and two if pelocity can grow at 8 or even 9% versus the 6 to 7 and a half% for paychecks it can probably trade at least at the same multiple as ADP and paychecks maybe even higher because the growth rate is higher so there's an opportunity for valuation to start coming up so now we can do some back out of the envelope math to estimate where the stock can trade after earnings once we have a change in expectations so we have our estimate of $714 for fiscal 2026 our new forecast with better growth we have a 28 times multiple that's the same multiple as paychecks and ADP so we assume that pay pelocity can trade in line with its peers 714 * 28 multiple equals a $200 stock which represents a 15% upside from the current stock price of $170 at the time so that's a 15% upside from the earnings release alone right so this is our investment case going into the earnings release we have a $200 Target which represents a 15% upside from the current $170 price and that's based on our fundamental forecast for Revenue growth to improve from 8 % to 9% for fiscal 2025 so that's a fundamental reason and because of that acceleration we think that estimates should go from that 695 level to get to that 714 level for fiscal 2026 based on our forecast so the market is not pricing that in from an expectation standpoint now because of the higher earnings estimates we believe the pelocity is multiple should rise from its 27 level to at least 28 or even higher at 30 which is the same level as ADP and paychecks or higher assuming the multiple can expand because its growth expectations are now higher than those two companies and then when we think about it from a risk perspective the downside of 695 which is the current fiscal 2026 estimate if we use a low multiple of 24 times which is what it was trading at a couple weeks before this time we get to about a $167 Target which is just a slight decline which means the stock is already pricing in this low growth scenario already and not pricing in a potential for an upside in growth and so I think that's a pretty good setup because it's not pricing in this improved Outlook I like it so that's the key to a good investment case you want to get the foundations of the fundamental picture right and then the valuation and then you want to think about how expectations will change and then once you think about all three of those things you definitely do well because you have a clear plan you know that numbers and you know where the stock is going to go now 15% is pretty good for just an earnings release so you can get 15% in just one to two weeks it's not bad but we can actually juice this up with options so next section I'm going to show you how you can get creative to get an even bigger payoff when you find small things like [Music] this all right options options give you the right to buy the stock for a fee or a premium you get the option to buy 100 shares at the strike price at a certain date and that's the xpre for a premium and of course you don't have to put down all the money that you would normally be required to buy all that stock you really can juice up returns using options so for example this is what I did in October 15th right before the earnings release I went long meaning I bought the December 20th xpre 170 strike calls I bought two of them for 1282 for premium so multiply that two means that I've put down 2564 as a debit I put that money down and now each of those options gives me the right to buy a 100 shares of pelocity stock at 170 that strike price by December 20th 2024 I also sold so I sold short meaning short a November 15th 2024 XPR also 170 strike call as well so I sold that for 9 and $96 so that works out to a 906 credit so that's basically just to help offset some of that premium cost so the net cost put down is 1,658 and that's the equivalent of buying 200 uh shares which is $34,000 at $170 a share but I'm only putting down 1,658 so now I'm only showing you this as one example of a way to make money once you understand how prices work and I want to give you a warning to protect you that I really don't recommend you try options until you have a very good grasp of the fundamentals of how stocks are priced and also especially how options are priced because if you don't understand things like black schols which is an options valuation methodology I don't think you're ready and I don't want you to lose money especially with options so I will do a video on options in the future if you're interested and with that that as a warning let's see how we can juice up returns with options because hey we all want to make money when we see a good opportunity right so the option value can move a lot because of the leverage right we're we're effectively buying a lot of stock with very little money down so what happens with this current option setup if the stock gets to where our $200 Target would be we're making about 1342 so that's an 81 or about 80% return so that's great right but also if it gets to 180 or below we're basically losing anywhere from 658 or the total uh money that we've put down 1,658 so we lose all of the premium because the options are going to expire worthless and so I like this structure because the downside is fixed and I also believe that there's a good chance the stock price would get to $200 and I could keep that option so this Long December 20th calls to keep making money if the stock keeps going Beyond 200 like for 2 210 which should give me an even higher return so we've done all the work of forecasting valuation we figured out a change in expectations we did all that work we set up an investment we did some options now all it is is just we wait for the earnings release we've effectively bought our stock around 170 the stock started to trade up slightly into the earnings release and now we just wait until what happens with the earnings release so now this is the big day the earnings release and you're going to see how all of this goes down and how stock prices revalue when it gets new information so the first thing is that pelocity releases its earnings on October 30th 2024 they released their first quarter 2025 earnings now the first thing that you'll see right away is that the revenue growth for one Q was 14% so that's a great Revenue growth rate right remember the guidance was about 8% growth for the year so that's definitely most likely a beat meaning they beat the estim and it's better than what research analysts and the market was expecting now more importantly as part of that they also updated their fiscal 2025 guidance now they expect revenues of 1.53 to 1.55 billion which represents 10% growth in Revenue growth and that's much better than the guidance of 8.3 earlier so that's the raise meaning that they now expect the guidance to be higher that's so they beat estimates and now they raise guidance and now when you hear beat and raise that's literally music to an Investor's ears because you know that the company's better performing better than expected they've raised their Outlook which definitely almost always means a higher stock price so you know you're going to make money so what does the stock do so the the the company released its earnings right around here so the October 30th 2024 release date now so the next day the stock opens all the way up 20% right away so it's up 20% immediately and it stays there at about 210 kind of Trades down a little bit but it just stays there over the next few days so now why so let's let's break down what's actually going on with the price so first thing is because earnings are better than expected and guidance for fiscal 2025 Revenue growth is higher now you can see expectations have moved up so these are the earnings estimates the next 12 months earnings per share estimate for pelocity and you can see that it's moved up from about you know 6.4 or so to 6.51 so you can see that increase in analyst estimates for fiscal 2025 and so that's one of the reasons that moves the stock price higher now second when we look at a valuation perspective this is the price to earnings multiple of pelocity as well as a couple of the other peers you can see that pity's multiple has also moved up as well so right after the earnings released the stock price jumps up and so now we get a higher multiple pity's multiple has uh gone up from that 28 to now it's set a 31 times multiple so it first gets to the paychecks ADP multiple around the time of the release and then it moves up to that 31 times multiple and it stays there the reason why that is because that stronger growth leads to a higher valuation multiple for the stock just like we anticipated which is another way of seeing the higher expectations come into the stock price so you can see these are all the prior estimates over here on the top as well as our forecast so then now let's look at the new estimates for Paylocity stock right after the earnings release so a couple days later now estimates are now $714 and it's gone up and and 662 for fiscal 2025 so when we look at the change from the prior estimate so right before the earnings release to the current analyst estimates you can see that they're all moving up about 3% so again it's it's a small move but that's a change in Market expectations so just to put that all together right you see this better fundamental Outlook you see the earnings per share Outlook going up and that's reflecting the improving fundamental trends for pelocity because of the higher Revenue growth so you get that rise in earnings estimates you get the rise in valuation and then that all leads to the stock price hitting that 200 or so stock price just like how we priced it before the earnings and of course it stays a little bit higher it gets actually get up to 210 but kind of bounces between this 200 and 210 Mark and you can see that this is the market re valuing the stock positively and of course it works for us because we prepared for it and the stock will likely keep rising over time as long as Paylocity grows their earnings okay so now the fun part how much money did we actually make with all that preparation well the first thing was we've put down 1,658 now the payoff at $200 a share which is where the stock went up to from a long call perspective so we have the $200 stock price and we have a $170 strike minus a 1282 premium so we have the option to buy it at1 170 so we get $30 from the $200 stock price if we minus the premium that works out to about 17.18 and we got two of those calls multiply that by 100 that gets us to about 3,436 in profit now the short calls which we sold to offset the premium we did $170 strike as well but because we sold the option to buy now we're uh minusing the 200 so now we have to pay up $30 but we're offsetting it a little bit with this 906 premium and so that works out to 20.94% return based on the money that we put down and of course the best thing is is now we own options to buy 200 shares of pelocity at $170 a share that works out to a $6,000 value of that position right because if it stocks at 200 and we can buy it 170 that's 30 bucks a position 30 * 2 is 60 * 100 gets us to $6,000 so that's why it's $6,000 in value so that value will keep increasing as the stock moves higher and of course that's one way to make higher returns because we didn't really put a lot of money down using options creatively so the most important thing to take away you've made it this far is to make money investing and that's the whole point of fundamental analysis you want to pick good companies companies with strong earnings outlooks and that are generating good returns from their Investments you want to Value them so you can get a good price and that means putting together a good forecast getting the right multiple so you can get the right price to buy and ultimately sell those companies and then you want to look for changing expectations if you want to look for opportunities to time when to buy and sell look for what's changing and look for what the Market's not pricing in if you do all three of these things guarantee you will make money and that's everything you need to know about fundamental analysis and to keep learning investing I suggest you actually watch this next video and if you'd like to learn further I am looking for the next 500 people to help mentor and teach on how to make money with Stock Investing and if you love this I suggest you check out our education program it's in the description because if you like this you're going to love the program I hope you enjoy this and learn something spent a lot of hours recording this so I'm a little tired and I will see you in the next video coming is coming being [Music]