When trading The Wheel Strategy, it is important that you only focus on stocks that you actually want to own. These would usually be value stocks. There’s a lot to talk about when it comes to the difference between value stocks versus growth stocks.
In this article, I will show you my criteria for how I choose which stocks to trade and what stocks not to trade. I’ll show you how to spot what is a value stock, and what is a growth stock, so that you can pick correctly.
Before we continue, this article is a part of our Options 101 For Beginner Series. This is a series of FREE on-demand video courses where you will learn the building blocks of options trading, the core concepts, how to avoid crushing mistakes, and much, much more. You can check out this free course HERE.
Using The Wheel Analyzer
The software that I like to use, The PowerX Optimizer, to find stocks has two components. It has the PowerX Analyzer and the Wheel Analyzer. Since this article is mainly focused on the Wheel Strategy, we will focus on the Wheel Analyzer.
Now on a day like this, where the markets are down, you can see, the S&P is down almost 1.5 percent.
The Dow is down 1.5 percent.
The Nasdaq is down 1.5 percent. This means that we have many opportunities here according to the Wheel Scanner.
Which are good stocks to trade? When it comes to The Wheel Strategy, there are two main things that you need to ask yourself. Do you want to own this stock, and do you want to own the stock at the strike price?
Why is this important? Because the first part of The Wheel Strategy is selling puts at the suggested strike price.
If the stock closes above the strike price that we sold on the expiration date, we just keep the premium. If it closes below, we are getting assigned and now we own shares of this stock. This is an important part of The Wheel Strategy because the next step is selling calls against these shares.
Let’s use Abbott Laboratories (ABT) as an example. This is a stock that came up on the scanner. Do we want to own the company? Maybe, but the strike price that is suggested is 132. That is too high, and I don’t want to be assigned at this price.
Then we have ADS, Alliance Data Systems, and this is a stock that is clear in a downtrend.
You get the idea, but how do you identify value stocks versus growth stocks?
Growth Stocks vs Value Stocks
There’s a button in the software, shaped like a megaphone, that takes you to Google Finance. They have a wealth of information that you need to decide if you’re looking at growth stocks or value stocks.
There are two main criteria that I like to use to identify a value stock over a growth stock. The first criteria is to see if they pay a dividend. Most of the time you will see that growth stocks are not paying dividends, but value stocks do.
Number two, when you scroll down in Google Finance, I want to see the financial performance. What I would like to see here is that this company, annually, still has some growth, but not too crazy.
Looking at the picture above, you can see the green bars are revenue and the orange bars are net income. Looking at ADS, you see that over the past five years, the revenue has declined and so have the profits.
Would you like to own a company where you see their revenue and profits have been declining over the past five years? For me, this would be a no. Even though ADS is paying a dividend, that is not a company that I want to own.
Let me show you a crazy growth company here like Zoom. Zoom recently got on the map, and they had this phenomenal run. What do we see when it comes to Zoom?
Well, first of all, they are not paying a dividend. However, this is not an automatic no because 2020 was kind of crazy. Even big companies like Google have not been paying a dividend recently. But wouldn’t you say that Google is a value stock?
What happened here to Zoom? We see that Zoom has been growing like crazy in revenue from next to nothing in 2017. Then growing super fast to more than three billion dollars in revenue in 2021.
Zoom panned out in 2020 because the pandemic put them on the map and made them profitable. Without that, it might have been a little bit tricky. There were other companies that also really soared in 2020, like, for example, Peloton.
If you look at their annual revenue, we see typical growth here. From a few hundred million dollars to four billion dollars. So this year is a very fast-paced growth, but as you can see, they are not profitable yet.
Looking at the quarterly performance, we see their revenue is declining as we are coming out of the pandemic. And as revenues are declining, we are seeing more in terms of losses. So that is not a company that you want to own.
Let’s go back and look at a few companies that popped up on the PowerX Optimizer that I personally liked a lot.
Finding More Value Stocks With The PowerX Optimizer
One of the stocks that came up was Caterpillar. They are a solid company that has been growing, even during the pandemic. There was a little bit of profit-taking and they moved down from $240 to $200.
There is a strike price of 190 on the chart. Would you want to own Caterpillar? This is where we first want to see what are their financials.
And we see Caterpillar, first of all, is paying a dividend. So this means it is most probably a value stock.
But let’s take a look at their annual income. Here we see they have moderate growth. They grew from around $40 billion to around 50, 60 billion dollars over the past few years. So this is not crazy growth like with Peloton and Zoom, but they are profitable.
2020 was a difficult year for many companies. I like to also look at their quarterly financials to see if they came out of the hole many companies fell into in 2020.
We see over the last few quarters, again, solid growth and also solid profitability. So for me, Caterpillar is definitely a value stock, not a growth stock.
Here’s another example, SYF, Synchrony Financial. We see that they are in perfect range here, and right now you can sell puts at a strike price of 42. That’s not bad at all for only three trading days left on this one (at the time of this writing).
We see that they are paying a dividend. So this is usually a really good sign that this is a value stock. But let’s make sure that we like the financials.
We see a nice annual growth over the past five years. Nice profitability. Again in 2020, lower revenue, lower profits. Very typical. Many companies got hit in 2020 with the pandemic.
Switching to quarterly view, we see they dug themselves out of the hole from 2020. September 2020, December 2020, March 2021, June 2021, we see nice growth. Then a little bit of a slowdown, but nothing dramatic here.
They are definitely a company that I would trade at a strike price of 42. Also, would I want to own this company at a price of 42? Yes, I would.
Here’s another example, TSM, Taiwan Semiconductor Manufacturing. As you can see, trading in a range here between $110 and $125.
They popped up with a strike price of 111 & 112, definitely still a good strike price.
But again, let’s take a look at this and see if this is a growth stock or a value stock.
If we refer to Google Finance, we see that they are paying a dividend, and this is always a good sign of a value stock.
Then we also see a nice annual growth, nothing too crazy here, going to above a trillion dollars in revenue.
In 2020, they soared because everybody needed chips for computers. Everyone was working from home, so they had a good 2020.
If we take a look at the quarterly report we see there is nothing too crazy going on, and super solid growth.
Let’s take a look at one more example. The Trade Desk came up on the scanner, and this company isn’t really well known, but this sounds like a good company.
The chart is a little bit all over the place, but let’s set this chart aside for a moment, and let’s just do our analysis. Let’s click on the little megaphone icon to see if they pay a dividend.
No, they don’t. And again, this does not mean an automatic no, but it is already a warning sign.
Now let’s take a look at their revenue here. They’re not bad at all. I see a nice value stock. As you can see, nice growth here from 400 million to 800 million. It is a smaller cap stock, compared to TSM at a trillion dollars, but definitely profitable.
Do I want to own it at a strike price of 80? No, as this is going crazy and all the way around here, so definitely not.
How do you identify whether you have a value stock and whether you have a growth stock?
Here’s the easy thing, if you can’t identify it as a value stock, it’s most likely a growth stock.
There is some discretion in there, but it is not crazy.
If you apply these two criteria, number one, do they pay a dividend? And number two, do you see nice and solid growth, both in revenue and in profits? Then you’re probably looking at a value stock.
If you would like to learn more about the two strategies that I trade, I suggest picking up a copy of my books. You can grab a copy of The PowerX Strategy HERE, and a copy of The Wheel Strategy HERE. All you have to do is cover the cost of shipping.
I also have two videos for you. One of them is explaining the “PowerX Strategy.“ The other one is explaining “The Wheel Strategy” in detail.
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