Hey Trader,
Imagine having something that limits your risk beyond your stop loss.
Plenty of traders only ever look at the chart. They never look at the fundamentals.
After all, fundamental and technical traders rarely mix.
However, that means you miss out on one of the best ways to put a floor under your stock. You do it by looking at the valuation.
Valuation tells us when long-term investors will finally step into a stock.
If you manage to pick up a stock with a technical floor near a valuation floor, you’ve got double the protection.
Few traders know what that looks like. That’s what I’m going to show you today.
What A Valuation Floor Looks Like
A valuation floor is the price where a stock gets too cheap for long-term buyers to ignore. It limits how far the stock should fall before your stop loss gets tested.
As long as the valuation is there, it’s like a put option to me. A put works like insurance against a deeper drop.
Hormel shows you how this works. I added up its last four quarters of earnings, and it made about $1.25.
That puts the stock around 12x earnings. It also pays a 6% yield.
To me, that 6% is like getting a 30-year Treasury bond with upside.
Wall Street hates food stocks right now. They’ve discounted Hormel as if it’s going bankrupt.
Hormel makes billions of dollars across a huge list of brands. The company isn’t going anywhere.
That’s why I see so little room underneath it. The downside might be a couple of bucks.
The upside could take it back to $25 or $26. The risk-reward is phenomenal.
Hormel could still get cheaper, though. Valuation alone won’t get me to buy.
Why Your Stop Loss Needs A Technical Floor Too
The chart gives me an idea of when to get in. It says nothing about what the company’s worth.
I need both. An oversold stock can always fall further and hit your stop loss.
On Hormel, the weekly indicator hasn’t bottomed yet. It’s getting close.
Right now, Hormel isn’t tradable. I won’t buy it because it hasn’t quite bottomed out.
Buying before the bottom just hands your stop loss more work.
Income investors can play it differently. If you just want the 6%, buy it, close your eyes and hold your nose.
Then don’t watch it. Checking every nickel up or down will drive you insane.
A valuation floor tells you how much room sits underneath a stock. The technical floor tells you when the falling has stopped.
When Both Floors Line Up
Constellation Brands gave me both floors this week. Money managers panicked and dumped STZ.
I bought some around $118 to $120. I expect the company to earn about $12 a share.
A 12x multiple on that gives you a $144 stock. I was buying well under what the business is worth.
The chart cooperated too. Around $120, STZ was breaking to the upside.
Then the long-term money showed up. Institutions were loading the boat.
Wherever the money goes, that’s where I go. I make sure the valuation makes sense first.
Qualcomm shows you what happens when a piece is missing. Its valuation is compelling.
Institutional money hasn’t gone into it, though. I can’t recommend buying it.
Without the buyers, a cheap stock can drift lower and test your stop loss. Money flow never lies.
How The Two Floors Back Up Your Stop Loss
Your stop loss gets you out once a trade turns against you. It can’t tell you whether you belonged in that trade.
The two floors answer that question before your stop loss ever has to. Run these three checks in order:
- Find the valuation floor. Add up the last four quarters of earnings and see what multiple you’re paying.
- Find the technical floor. Check the weekly indicators, and wait if the stock hasn’t bottomed out.
- Watch for the buyers. Institutions have to want to own the stock too.
When all three line up, your stop loss becomes your last line of defense. It’s no longer your only one.
If you ever worked for me and skipped the research, I’d fire you. Valuation means a lot to me.
I do this research for my Genesis COG members. Last year, I told them to load the boat on Devon at $32.
We got out around $48. That’s $16 a share from buying when the numbers made sense.
The Genesis COG System gives you the complete methodology behind calls like that. You’ll learn to check the numbers before you trust the chart or your stop loss.
The Genesis Cog Scanner adds real-time signals on top. Together, they help you find stocks standing on two floors instead of one.
Join the Genesis COG System Today
Professor Jeffrey Bierman
Creator of the Genesis COG System
