0:00 The biggest mistake stock market investors make is they value every single stock the same way. They value Amazon the same way they value Exon Mobile the same way they value a dividend stock, the same way they value some kind of a growth company and they value every single stock the same way. This is the biggest mistake ever because maybe a stock is in stage five which is capital return. You can't value the stock the same way if it's in stage one in startup or stage three where it's just becoming profitable. All those stocks are in different stages of the business cycle and therefore they have to be valued differently. You can't value all of them with a simple DCF or with some kind of a online valuation model that will just give you fair value and you don't have to do any work. So in
0:46 this video I'm going to give you a very simple trick you could say to value a company with no growth, a company with some growth or you could say a quality compounder like Amazon and others and then a growth company where the revenue is really accelerating and there's massive massive growth. Maybe it's unprofitable and I'm going to give you a lot of educational stuff. Such videos they don't get a lot of views. So if you do enjoy them, all I'm asking is please press the like button and let me know what you think in the comments. Now, the first one is Verizon, which is a stock with no growth. The biggest mistake you could say investors make with stocks like Verizon, and I get it all the time. They send me a lot of stocks. They tell me, "Look at Verizon. They're trading at eight times earnings. Eight times earnings is dirt cheap for a stock like Verizon. Or look at the other stock.
1:31 It's trading at six or seven times free cash flow. Verizon is trading at eight times free cash flow. Therefore, Verizon is extremely extremely undervalued." This is the most common trap you could fall into. by a mile. And the mistake here is that you're looking at price to free cash flow or price to earnings ratio. And price means the market cap. But some companies have some debt. Now, if you want to buy the whole company, let's say you want to buy the whole of Verizon. You can't just acquire the equity. You also have to assume the debt. It all comes in together. So, if you want to assume the debt and the cash position and everything, you have to look at enterprise value. Enterprise value for Verizon is $331 billion. The market cap which is used to
2:17 come up with a PE or price of free cash flow is a $168 billion. So enterprise value is more than twice the market cap. So the PE is not really at eight times. It's more like 16 or 17 times. Maybe Verizon is not such a bargain anymore, right? Well, if you look at enterprise value to free cash flow instead of price to free cash flow. Enterprise value to free cash flow, it's 16.7 times. This is a huge difference between 8.3 and 16.7 for a company that has little to no revenue growth. 1 to 2% revenue growth. And this is how a lot of investors fall into those traps. Whenever they look at those stocks, they buy it because the PE is low, but they don't look at enterprise value. They look at market cap and the company is declining in revenues or is growing 1 to 2%. And if
3:03 I'm paying 15 times for a company that's only growing one or two% then this is more than fairly valued and it's nowhere close for the company to be dirt cheap or to be extremely extremely undervalued. So this is a big one. Now because Verizon is not growing and a lot of those companies aren't growing, they normally try to return capital back to shareholders. This is what happens in stage five which is capital return. This is when you could see a mode, a competitive advantage. And this is when the company is mature, you could say, and it's about to enter the decline stage where it's going to get disrupted by some kind of a new company. But before that, they can no longer reinvest for growth. They can no longer reinvest in themselves. So they try to pay their free cash flow through buybacks and dividends back to shareholders. And this
3:49 is what the company do. Pepsi does that, Coca-Cola does that, some railroad company do that as well. that some companies they just have no choice but to do that. Now, if I look at Verizon, I'm actually getting a decent dividend yield. The dividend yield is 6.7%. Now, my job here is to find out is if the 6.7% dividend yield is actually a trap or is it actually a good opportunity and they can sustain it. Now, another mistake that investors make is they look at the Yahoo Finance payout ratio. This is a mistake because the payout ratio on most of those websites is used by earnings. So, it's an earnings payout ratio or earnings per share payout ratio. But to get the actual number that the company can use to pay out dividends, you have to use
4:35 free cash flow or free cash flow per share, which is why I always like to go through the cash flow statement and that's when it gets a little bit technical. Total number in free cash flow is about $21 billion. We look at the total dividends they paid. This is 11 billion. We can put it on the chart. So, this is to me is a decent payout ratio. Whereas the company has 21 billion in cash flow. They're paying 11 billion in dividend. They still have like $10 billion left in free cash flow for them to increase the dividend, for them to pay down their debt, for them to do buybacks, for them to do anything with it. So, in this case, the $6.7% dividend of Verizon is actually safe and it's not a trap. So, this is the return I'm going to get. It's 6.7%. But we did mention that the company still has about
5:22 $10 billion in extra free cash flow that they're going to likely return to me as a shareholders through buybacks, maybe through dividends, or maybe they even pay down the debt, reduce interest expense, and they also deliver value to me as a shareholder this way. Now, for me to measure that, I have to look at the free cash flow yield. The free cash flow yield is about 12%. So, if the company pays out 100% of their free cash flow as a dividend, I'm going to get a 12% dividend yield. So, if I'm holding Verizon, and Verizon is more of a mature company, I'm likely going to get a return somewhere close to the free cash flow yield, which in this case is about a 12% return. Now, I also have some revenue growth with Verizon, the revenue is about 1 to 2%. Now, assuming margins remain equal and we don't get a mult
6:09 multiple expansion, we don't get a margin expansion. If revenue is growing 1 to 2%, then free cash flow will likely also be growing 1 to 2%. So if the free cash flow yield is 12%, I add in 2% of revenue growth, I will likely be getting 13 to 14% annual return if I'm holding Verizon. So this is how, for example, I would value a company with no growth. It's not much about, you know, the growth of the company like earnings per share growth or revenue growth. It's more about how much free cash flow they're generating and how much are they returning to me and how much of this dividend or the free cash flow generation is sustainable and I try to make sure I'm getting at least 14 to 15% in a total yield which is normally a double every 5 years and this is the
6:55 case for Verizon. Now the second kind of stock is Costco. Costco I would put it in the mid-stage you could say more like you could say operating leverage capital return but mainly operating leverage so those are stocks like Meta stocks like Microsoft stocks like Amazon and even stocks like Costco and the quality compounders that are very popular on YouTube this is when you see the moat this is when you see the competitive advantage this is when you see all the amazing metrics that people love to track and Costco is a good company now if I look at Costco unlike Verizon I do see some growth the company has been growing in earnings per share 7% 16% you know 10% in some websites you could look at the estimates in this case it's 11% 9% 11% so this is about a 10 to 11%
7:42 earnings per share growth I would like to take in 11% now the second thing I want to look at is the multiple the multiple for Costco is about 49 times trailing earnings 45 times is extremely extremely expensive and for me to try to model those kind of compounders. What I mainly try to do is I try to look at the earnings per share growth. I try to put in something sustainable. So 10 to 11% is sustainable. It's highly highly achievable for a company like Costco. But I also want to do my best to not really pay too much above the historical average. Now the reason why I do that is because in investing in general, it's extremely hard to determine what is a fair multiple for a stock. Sometimes you
8:27 might know from experience like you've seen a lot of stocks trade in a certain multiple. Sometimes you seen it before or you know a little bit about a certain industry but most of the time no one really knows where the stock will end up trading at. So, if I look at a historical chart of a PE ratio and I notice, for example, that Costco has a history of bottoming out at 35 times earnings and I buy Costco at 35 times earnings, at least I'm putting the odds on my side that I will most likely end up not overpaying too much for Costco. It's the same way with Amazon. It's the same way with Facebook. People like to pretend another way. They like to pretend that they know the exact multiple it should be trading at. It could be any kind of multiple. And with investing, it's a lot of things about putting the odds on your side. So for me personally, looking at Costco and
9:14 looking at it, it's trading at 49 times earnings. Now Costco hasn't expanded their has their margin a lot from 2023 when it was trading at 3940 times. Not much has changed. Now if a lot has changed and the company is a different company, then maybe the multiple expansion is actually deserved. But in the case of Costco, I don't believe the multiple expansion is deserved. So, I want to do my best to model under 40 times earnings again to put the odds on my side with uh Costco. Now, for Costco, this is all I'm doing and you could do it anywhere and I and and anyhata kind of website. And I put in the current earnings per share of 1824 and we talked about 11% for the next four years or the next 5 years I should say until 2030. I tried to aim for a double every 5 years
10:01 or 15% a year. That's what I personally aim for. And I put in 40p because we looked at the chart and we determined that uh Costco didn't do anything different to deserve such an expansion. So why should we pay 49 times? To me it's uh it's a little bit too extreme if I want to buy the stock. So I put in 40p. In this case the upside from here is only 47% or only an 8.3% annual return. And if I want to double my money over the next 5 years or get a 15% annual return, then I would have to buy Costco at $637 per share or negative 25% from here. And this is how I mainly try to value them. I look at the historical earnings per share growth and I look at some analyst estimates. The analysts are not going to
10:46 always be right, but I try to be a little bit below the analyst estimates. So if the analyst is expecting 15%, I try to be 13 14%. And it matches with the historical average which is great. Then I look at the multiple expansion that the company has gotten and I compare it with their net income margin. If net income margins have expanded like in the case of Microsoft, Microsoft deserves a multiple expansion. If earnings per share has accelerated in growth, maybe it deserves a multiple expansion. But if I look at the company in general and I see no reason for a multiple expansion, then I would not be too comfortable paying above the historical average and I try to look at the history of the P ratio and I try to find some kind of a pattern where the stock has kind of bottomed out before or where it has been a good time to be
11:32 buying it and I try to buy near this level to put the odds on my side because this is what investing is about. Investing is not something that you could predict kind of numbers and predict ratios and predict all these things. It's more about uh trying to make smart bets and taking some kind of a margin of safety because all those gross numbers and everything is subjective. We don't know for sure the gross numbers. We don't know for sure the multiples and those things are very very important. Now the last one which I believe is the most important part of the video and this is mainly the growth stocks and this is the biggest kind of mistake that investors make is they look at a growth stock that I talk about on YouTube which is mainly in stage two hyperrowth or stage three where the company just turns profitable and they
12:17 tell me this company has no mode. This company has no competitive advantage. It has no mode man. It it just has no mode. Well, if you're saying that you're comparing a company in stage two, the same way you're valuing a company in stage four when it has operating leverage in a stage five in capital return. Now, Costco now it's like in stage four. Before it used to be in stage two. When you are looking at Costco, let's say in the 70s or whatever, Costco had no moat. Costco had no competitive advantage, but the moat was being developed. The moat was being built, but you're not going to be able to see it too well. you're not going to be able to seize a high return on vested capitals that everyone can see and it's not going to be so obvious which is why it's much much riskier but that's also why it's much much more rewarding. So it's a totally different view that you
13:03 need to have on those growth stocks. And I have a rule of thumb that I want to share with you today on them. And if those stocks are unprofitable or let's say they're early in their cycle, so maybe stage two, stage three, if they're early, I try to use price to sales ratio and TAM which is total addressable market. Why do we use price to sales ratio? Because in stage two, the company or even in stage three, the company is not focused on being profitable. It's not focused on operating leverage. It's not focused on having high net income margins. It's not focused on doing buybacks. It's not focused on doing dividends. It's focused on growth. It's focused on expansion. It's focused on building remote. This is what a young company should be focused on. If I see a young company that's doing a dividend, I don't even want to own the company
13:48 because I want a company that's focused on growth if I'm looking for a young or an early stage company. So, because it's focused on the growth stage of the company, you're not going to be able to accurately predict their net income margins, which is why sometimes it's best to use a price to sales ratio. And a total addressable market is a good way of doing it. You know, let's say for example, uh when people were valuing Tesla back in 2019 2020 and a lot of people valued it where they looked at the potential TAM of electric vehicles by 2025 and then they said if Tesla gets a 10 or 20% market share maybe let's say that's I don't know 20 billion in revenues or 50 billion in revenues and if it gets a five times sales multiples and you get a 250 billion market cap as a market cap was 20 billion and this is
14:35 how you could kind of value those things when it's unprofitable. Once it's profitable or it's more in the mid-stage, you could look at a PA ratio or the management guidance. And I'm going to give you some examples. But there's some traps that you have to avoid whenever you're valuing those growth stocks. And one of them is stocks like Snow and a lot of those cyber security stocks, which I really not a big fan of in general. And the main trap with those is stockbased compensation. And stockbased compensation is huge with a lot of tech companies, but it's notorious with those cloud related stocks and a lot of the AI related stocks unfortunately. And if you look at the big difference between GAP earnings per share and non-GAAP earnings per share, it's massive. Like in the case of Snow, non-GAAP earnings per share was
15:23 around 98 and GAP earnings per share was negative $2.55. Same thing in 2025. and snow is pretty much not expected to be profitable ever. Not before 2028, 2029 on a gap basis. Now, why is this happening? It's happening because of stockbased compensation. The company has negative 1.3 billion in net income. It's unprofitable. It adds some depreciation and amortization, but the stockbased compensation is $1.6 6 billion which ultimately adds to $873 million in cash from operations. So this is something else that you have to look at where a lot of people value them on a free cash flow basis and they tell me look at this stock is free cash flow positive. Well,
16:09 of course it's free cash flow positive. They're adding so much in stockbased compensation it's not even funny. But then if you look at the capex is very small total free cash flow is about 776 million. The company is buying back $1.3 billion for them to offset the stockbased compensation expense. Now, how how are they buying $1.3 billion and they only make 776 million in free cash flow? They're doing it through debt. They take on some debt or they use some of their cash position and that's not really the best kind of free cash flow statement you want to look at and those kind of traps I like to avoid them in general. Now, some stocks might have some stockbased composition in the beginning. Let's say like SoFi, you could look at the difference between net income and stockbased compensation. And for example, back in 2023, stockbased
16:57 compensation was much higher than net income. But over time, net income for SoFi has been expanding way beyond stockbased compensation. And if the trend is getting better, then at least this is something you could potentially invest in. But if it looks something like snow or something like Zcal or a lot of those cyber security stocks, uh I would look at them a few more times and try to think about it and it's really really bad. But to give you an example of the second case scenario which is the most common one and this is a profitable one or mid-stage you could use PE and guides. This is with a stock that I own which is mama. Mama is up 78% year to date. It's more of a food company. I bought it at $1.74 back in 2023. But if you look at the PE ratio of a lot of
17:42 those growth stocks, and in the case of MAMA, it's trading at 63 times earnings. Now, anytime you see 63 times earnings, you're going to say, "Oh, the stock's overvalued." But if you looked at it in 2024, it was also trading at 54 60 times earnings, but the stock is up like two or 300% from 2024. So maybe it's not a good idea to skip a stock just because the PE ratio is high, but maybe it's a better idea to look at the management's guidance and have a four to five year outlook to determine if the stock is actually overvalued or undervalued. But here is trading at 63 times earnings. Now if you look at the management's guidance and they have a good track record of delivering and overd delivering on this guidance their guidance is $1 billion in sales by 2030.
18:31 Now this is very simple. We take in the billion dollars in sales. Okay. And the management did give guidance of long-term net income margin of 10%. And most food companies they trade at a 10 9 11% net income margin. This is the standard in the industry. So this is an easy one to figure out. It's not really guessing like a rocket company what kind of margins they can put up. This is like it's been proven and it's very very simple. So I time it by a 10% net income margin. I try to take it 10%. And in total we get about $100 million in net income. Very easy. And then I time it by 20 times earnings. Most food companies they trade between 15 to 20 times. Now the stock is trading at 60 times because it's growing so much. And it will likely be above 20p
19:17 four to 5 years from now. But I'm going to take in 20p in general, which I believe is fair. And I time it by 20p. I get a $2 billion market cap. The current market cap is $555 million. So I divide it by 555 million. I get 260% on the upside. Over the next four to five years, if the management delivers on their guidance, now in this case, is the 63p really this overvalued? Maybe not. You know, maybe it's worth a deeper look before we make the determination that the stock is overvalued just because the P is high. And again, the P is high because of what I explained to you here that the management and the company, they're not too focused on being profitable. They're not too focused on having the most the highest net income
20:04 margin ever. But they're focused on growth. They're focused on supply chain. They're focused on building the mode, having a competitive advantage. And then once they start growing and getting more mature then they focus on operating leverage and then they ultimately start doing buybacks and dividends and then after years and years and years they ultimately enter the decline stage and then they get disrupted by some kind of a new competitor and every single company goes through the cycle. There's some exceptions they survived but most of them that's the cycle and you have to know where the company is in the cycle and how you should value it. Now, I did my best to give you a simple explanation on how to value every single one. But of course, it's sometimes a little bit more complicated than that. There's a little bit more technicals in the income statement and the balance sheet.
20:49 Sometimes the oil stocks are a little bit different to values than cyclical stocks and semiconductors, which is why I'm doing a full playlist on how to value every single stock from every single industry in my Patreon. And I'm going to be uploading one every single month for 2026. And if you're interested in joining and learning a little bit more of what I do, this is Zulink if you're interested. But thank you again for watching very much. It was not financial advice. Hope you learned something and hope you enjoyed it. If you did enjoy it, please press the like button and maybe consider subscribing. So, I'll talk to you in another
