Most investors are perpetually Pollyanna-ish. If the market’s up, all is well.

Not me.

I deal in facts, figures, and plain truths – whether they make me comfortable or not.

That’s not cynicism. It’s realism. And realism pays.

So when I say people hate this chart, it’s because there’s nothing comfortable about it.

The cyclically adjusted price-to-earnings (CAPE) ratio – also called P/E 10 – uses inflation-adjusted earnings averaged over the past decade. It smooths the cycle and gives a clearer long-term view of price versus earnings.

The chart below plots the CAPE of the S&P 500 in standard deviations from its long-term mean. In simple terms, it shows how far today’s valuation sits from “normal.”

Right now the reading is near three standard deviations above average.

That is an extreme level by any historical yardstick. Readings that high show up only a tiny fraction of the time – roughly a few tenths of one percent.

For years, I’ve tried to alert investors to the market’s rich valuation. But we live in a value-blind regime. Most folks only care about rising prices and earnings growth.

Those matter. But they’re not everything.

When you focus on the right things – not just surface-level hype – you become a more principled, disciplined investor.

It doesn’t mean you stop investing. It means you raise your standards.

A market drenched in rich valuations isn’t one to avoid. It’s one that demands scrutiny and wisdom – the kind value investors have practiced for decades.

You weigh price against quality. You insist on a margin of safety. You accept that the crowd can be wrong for a long time.

Frankly, I like when most people ignore this. It gives me an edge. I look where others won’t because they’re busy chasing buzz. (My August 15 Value Meter column is a perfect example.)

Right now, the best values I see are in small caps. They trade at a clear discount to large caps.

Over full market cycles, that’s often where leadership flips and excess returns emerge. So long-term investors should be ecstatic about this.

History favors small caps on a global scale, which makes today a real opportunity.

But don’t look only at the U.S.

Over the past 20 years, U.S. small caps have lagged large caps. But abroad, the story flips. In developed international markets – and in emerging markets – small caps have led.

Leadership rotates. Valuation gaps close. That is how cycles work.

The long-run data also suggests the U.S. gap is likely to narrow. Trends mean-revert, and current valuations help. (When you can buy durable small businesses at a discount while attention fixates on mega-cap winners, the odds tilt in your favor.)

That’s why it’s better to buy when small caps are out of favor – when focus is elsewhere and sentiment is sour. It’s not about calling a top or a bottom. It’s about treating price as a key part of the process and letting time do the heavy lifting.

Today, that discipline seems boring. Good. Boring sets you apart.

Take advantage of it.

The post How to Gain an Edge in Your Investing appeared first on Wealthy Retirement.

Looking at the results from 2024, I’m pleased to say it’s done exactly that – and then some. Let me show you what I mean with some hard numbers.

Stocks that scored below 3 on our Value Meter scale, suggesting they were undervalued, have gained an average of 4.3% in just 119 days. Stretch that out over a full year, and you’re looking at a projected 13.6% return. Not too shabby in today’s choppy market.

On the other hand, stocks that scored above 3 on our scale have dropped by an average of 11.8% in 114 days – a stunning 42.2% annualized loss.

Even more telling is that since we started including Value Meter scores last May, every single stock that’s fallen by 15% or more had a score above 3.6.

That’s not just correlation; that’s the kind of predictive power that can save investors from serious losses.

So what makes The Value Meter different from other stock rating systems? For one thing, it doesn’t get distracted by surface-level metrics like revenue or price-to-earnings ratio, which often lack context. Instead, it digs deeper into what really matters: how efficiently companies turn their assets into cold, hard cash.

Think of it like buying a house. You wouldn’t just look at the asking price, would you? Of course not. You’d check the condition of the roof, scope out the neighborhood, and research what similar homes have sold for recently. The Value Meter applies that same thorough approach to stocks.

The system zeros in on three crucial factors:

• Enterprise value: how much you’d have to pay to buy the whole company, including all of its outstanding shares
• Net asset value: what the company owns minus what it owes
• Free cash flow: how much cash the business generates from its operations.

By weaving these pieces together, we get a crystal-clear picture of whether a stock is truly cheap or expensive. And as the numbers above show, this approach has been remarkably good at spotting both bargains and danger zones.

But here’s what really sets The Value Meter apart: It doesn’t just find cheap stocks – it finds cheap stocks that are worth buying. Plenty of stocks look cheap, but The Value Meter helps separate the real bargains from the value traps thanks to its laserlike focus on cash generation.

Now, keep in mind that no investing tool is perfect. But in a market where hype often drowns out reality, having a reliable tool to measure true value is more important than ever – and The Value Meter is proving to be one of the sharpest tools we’ve got.

Looking ahead to 2025, I expect The Value Meter to keep doing what it does best: steer investors away from overvalued stocks while pointing them toward undervalued companies with rock-solid fundamentals.

Be excellent,

Anthony

P.S. What stocks would you like me to run through The Value Meter next? Post the ticker symbols in the comments section below.

The post The Value Meter: More Than Just Another Stock-Rating Tool appeared first on Wealthy Retirement.

Yet some of the world’s most successful investors swear by it.

It’s also one of the few investment strategies grounded in sheer common sense. The core of value investing is simple: Buy shares of a solid business for less than they’re really worth.

Not only does this minimize downside risk, but as the market eventually recognizes the company’s true value, patient investors can reap handsome rewards.

But just because it’s simple doesn’t mean it’s easy.

Successful value investing requires independent thinking, meticulous research, and the discipline to tune out the crowd. That’s why having a clear, objective framework is critical in identifying genuine bargains amid the market’s noise.

Since taking the helm of Wealthy Retirement‘s Value Meter column, I’ve sought to help readers better gauge whether stocks are overvalued or undervalued in a way that isn’t endlessly complicated.

The father of value investing, Ben Graham, believed financial analysis should be simple, requiring no more than basic arithmetic. While the system behind The Value Meter uses a tad bit more than arithmetic, it does aim to be simple. In fact, it’s based on only three key metrics.

The Value Meter Criteria

The first metric gets to the heart of what makes a good business: the ability to generate profits. But what’s the best measure of profitability?

Reported earnings can be misleading. Massive one-time gains, shifting accounting policies, and management trickery can all distort a company’s true profitability. That’s why most value investors insist on following the cash.

Free cash flow is the primary (but not only) measure of profitability I look at. It represents the cash a company generates after subtracting operating expenses and capital expenditures.

Steady cash flow is the lifeblood of any business because it allows the company to fuel growth, reduce debt, and reward shareholders.

After I determine a company’s free cash flow, I like to compare it with the company’s net asset value, or NAV − the difference between its assets and its liabilities. This allows me to assess how efficiently the company is using its resources to generate cash.

The higher the ratio of free cash flow to NAV, the better.

For example, let’s say Company ABC and Company DEF both have $10 billion in net assets, but Company ABC brings in $40 billion in free cash flow while Company DEF brings in just $20 billion. This means Company ABC is twice as efficient as Company DEF at turning its assets into cash.

Once I’ve calculated this ratio over each of the past four quarters, I’m able to see where the company ranks among the roughly 6,000 U.S. exchange-traded stocks in my database.

The third key metric is the hypothetical cost of acquiring the entire business, also known as its enterprise value, or EV. Unlike market cap, EV accounts for a company’s total acquisition cost, including both equity and debt.

Just as I do with free cash flow, I compare each company’s EV with its NAV. A low EV/NAV ratio suggests that you’re paying relatively little to acquire the company – a hallmark of an undervalued stock. So the lower the figure, the better.

Lastly, I score each company by averaging its ranking for each measurement and using basic statistical analysis to assign it a rating on a scale from 0 to 6.

Those scores correspond to five different categories: “Extremely Undervalued,” “Slightly Undervalued,” “Appropriately Valued,” “Slightly Overvalued,” and “Extremely Overvalued.”

At the bottom of each of my Value Meter columns, you’ll find all of this information compiled into a simple graphic. Here’s an example:

Overall, my Value Meter system favors companies that are producing high levels of cash relative to their net assets while trading at low EVs relative to their net assets. If a company ranks well in both categories, that indicates that it’s both more efficient and cheaper than its peers.

Now, admittedly, my system isn’t perfect.

It clearly prefers asset-heavy companies with ample free cash flows, which are typically mature companies rather than those in the early growth phase.

As a result, it tends to not give positive ratings to fast-growing businesses that are light on capital, some of which turn out to be phenomenal investments. Most growth-focused investors would consider that a huge flaw.

But for anyone seeking a straightforward way to identify potentially mispriced companies, The Value Meter offers a solid start. Its unwavering focus on cash generation and asset value can help investors stay grounded.

Value investing is not the only way to build wealth in the markets, but it has proved its merits over many decades. The Value Meter’s aim is to make this timeless strategy more accessible than ever.

If you have any questions about my Value Meter system (or if you have any stocks that you’d like me to run through The Value Meter), feel free to post them in the comments section below.

The post The Value Meter: Using Common Sense to Find Bargain Stocks appeared first on Wealthy Retirement.

After its IPO in June 2023, the stock price fell to about $30 per share. But since then, it’s staged a huge reversal, surging more than 200% to its current price of about $95.

However, post-IPO price spikes are a classic trap in the investing world, so I encourage investors to temper any feelings of FOMO with some hard financial facts.

That’s where my Value Meter comes in. Let’s see what it has to say about Cava.

First, let’s examine the company’s enterprise value-to-net asset value (EV/NAV) ratio. This number tells us how much the market values the company relative to its assets.

Cava’s EV/NAV is a whopping 19.0, nearly triple the average of 6.6 for similar companies. This means investors are paying a big premium for Cava’s growth potential, which is typical for stocks that have recently gone public.

But while high-growth companies often trade at a premium, we need to ensure the growth is there to back it up.

And Cava’s recent results are impressive.

In Q1 of 2024, the company grew its revenue by 30% year over year and opened 14 new restaurants. It even turned a profit – no small feat for a young restaurant chain.

But here’s where things get sticky. Cava has been burning through cash as it expands. In three of the last four quarters, it had negative free cash flow.

On average, its free cash flow was -1.3% of its net assets during that span. That’s better than the -5.3% average for similar companies, but it’s still concerning to see a company consistently spending more than it’s bringing in.

To be fair, in Q1, Cava generated positive free cash flow for the first time ever. That’s a good sign, but one quarter doesn’t make a trend.

And while Cava’s concept seems to resonate with customers, rapid expansion comes with risks. To build on its success in the first quarter, the company will need to maintain the quality of its offerings and find good locations as it enters new markets.

Speaking of building on success, the company’s growth plans are ambitious. It aims to hit 1,000 locations by 2032, up from 323 today. That’s a lot of new restaurants to open and a lot of cash to spend.

Cava’s innovation is another bright spot. The company is currently rolling out a grilled steak option that could boost sales, and it’s testing a new loyalty program that could drive repeat visits. These are smart moves that could fuel growth.

But here’s the rub: Much of this potential seems to already be baked into the stock price.

Cava is trading at a premium valuation, and the market expects big things. If the company hits a bump in the road – say, a few bad restaurant openings or a slowdown in sales growth – the stock could take a hit.

Don’t get me wrong, I like Cava’s concept. Mediterranean food is hot right now, and the company’s customizable bowls and pitas hit the sweet spot between healthy and tasty.

But as an investor, I have to look beyond the delicious food and focus on the numbers. And right now, they don’t give me confidence in the stock’s valuation.

That doesn’t mean Cava is a bad company. It just means the stock price might be running ahead of the fundamentals.

For long-term investors who believe in Cava’s growth story, it could still be worth a look. But you might want to wait for a pullback before loading up your plate.

The Value Meter rates this one “Slightly Overvalued.”

What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.

The post Is Cava’s Sizzling Stock Too Hot to Handle? appeared first on Wealthy Retirement.

The stock is MicroStrategy (Nasdaq: MSTR).

I first criticized MicroStrategy in early 2021. I was quoted in The New York Times, Bloomberg, Fox Business and other financial media about what I thought was “the most irresponsible action [I’d] ever seen from an executive team or board.”

My issue with MicroStrategy was that despite operating a software business, it had shifted its focus to buying and holding Bitcoin.

The company was borrowing money to acquire more and more Bitcoin, and CEO Michael Saylor said he planned on never selling any of the beloved cryptocurrency.

Regardless of what you think of Bitcoin, that’s not a business model. And I was outraged that the board of directors rubber-stamped this foolishness.

The stock was trading in the $600s when I first started slamming it. A year later, its price had been cut in half. And by the end of 2022, the stock was trading in the $130s.

But when Bitcoin hit a new all-time high last week, MicroStrategy soared to a 25-year high of over $1,800.

And a bet on it going back down is one of the biggest slam dunks I’ve seen in the market.

The stock price is closely tied to the price of Bitcoin. If Bitcoin drops, MicroStrategy will tank. Bitcoin is volatile, so at some point, it will head lower. And it feels like that will be sooner rather than later, as the cryptocurrency has nearly doubled in less than two months and has tripled since October.

Plus, last week, rapper Drake posted a video of Saylor talking about Bitcoin on his Instagram account, which has 146 million followers. It reminds me of the Matt Damon crypto.com commercial that aired right around Bitcoin’s previous peak. Those kinds of things – public endorsements from some of the most famous celebrities on the planet – don’t happen at bottoms. They happen near tops.

But more importantly, even if Bitcoin doesn’t drop, there is still no reason to own MicroStrategy’s stock.

[Editor’s Note: Since Marc finished writing this column on Friday, Bitcoin has dropped by nearly 3% and MicroStrategy has fallen by a whopping 16%.]

The company owns 205,000 Bitcoin, which has a total value of about $13.7 billion. The market cap of the stock is $28.1 billion. In other words, shareholders are paying nearly two times the value of the Bitcoin the company owns.

If you want exposure to Bitcoin, a better option is to simply buy a Bitcoin exchange-traded fund (ETF), like the iShares Bitcoin Trust (Nasdaq: IBIT) or several others. These closely track the price of Bitcoin but don’t have an outrageous 2X valuation. In fact, the ETFs are pretty much priced at their net asset values.

There is no valid reason to own MicroStrategy’s stock unless you think Saylor, the CEO, is a brilliant trader and you’re comfortable with him continually borrowing money in order to buy more Bitcoin.

In early March, the company raised $800 million by offering convertible bonds. The purpose of the new debt? To buy more Bitcoin. Then, last week, it announced it was selling another $500 million of notes for the purpose of… you guessed it, buying more Bitcoin. So that’s $1.3 billion in debt in just one month.

The true value of this stock – based on the 205,000 Bitcoin that it owns – is $816, which is just over half of what it’s trading at now. And that’s with Bitcoin at all-time highs of just below $70,000.

“Wait!” you say. “What about MicroStrategy’s software business?”

Revenue was 14% lower in 2023 than it was 10 years ago, and free cash flow was less than $10 million.

Let’s be generous and assign the company’s software segment a price-to-cash flow (P/CF) ratio of 20. (Normally, I would give a struggling business with declining cash flow a multiple of 10 or less, but like I said, I feel generous today.)

So what could happen to MicroStrategy’s stock if Bitcoin slips? Based on the company’s holdings of 205,000 Bitcoin and the P/CF ratio of 20 for its software business, here’s what the stock should be worth:

You may be thinking, “I don’t own MicroStrategy, so I don’t really need to be concerned.”

Well, lots of mutual funds own it.

The Fidelity Canadian Growth Company Fund has a 1.3% allocation to MicroStrategy, which has an office in Ottawa. And the Fidelity Small Cap Growth Fund (FCPGX) has nearly 1% of its assets in the stock.

The iShares Russell 2000 ETF (Nasdaq: IWM) also has 0.5% of its portfolio in MicroStrategy. Since it’s an index fund, it must stick to the allocation of the Russell 2000 index, which includes the stock.

MicroStrategy is in several other well-known indexes too, including the Nasdaq Composite, the Russell 3000 and the S&P SmallCap 600. So any index fund or ETF that is based on those indexes will have some exposure to MicroStrategy.

The stock dropped by more than 80% last time. This time could be even worse.

We’ve seen this movie before. We know how it ends.

Not well.

The post The Worst Stock in the World appeared first on Wealthy Retirement.

Last week at The Oxford Club’s 24th Annual Investment U Conference, Chief Income Strategist Marc Lichtenfeld received a special request from a Member…

Record a video on how to short stocks.

In this week’s State of the Market, Marc is happy to oblige. In this video, he shows you that shorting a stock is far simpler than it sounds and he teaches you how to get started.

Shorting is when you sell a stock that you don’t own but agree to purchase at a later date.

Shorting is a great strategy to make money in a bear market or when you expect a stock to fall.

But as Marc tells you in this week’s episode, there are a few important aspects of shorting that you need to know, including…

• How to start short selling with your broker
• When to short stocks
• Payout quirks of shorts.

Join Marc in this week’s State of the Market and learn how to make windfall profits on stocks that are overhyped, overvalued and destined for a fall.

The post How to Short a Stock appeared first on Wealthy Retirement.