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- [00:01]
Robert Kroke
Have you ever rearranged your furniture and discovered the carpet underneath looks brand new, while the rest of it looks, well, not so new?
- [00:07]
Austin Hankwitz
It's time for a carpet upgrade.
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Robert Kroke
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Austin Hankwitz
choices at simple prices from all the top brands.
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Robert Kroke
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Austin Hankwitz
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- [00:33]
Robert Kroke
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Austin Hankwitz
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Robert Kroke
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Austin Hankwitz
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Robert Kroke
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- [00:50]
Austin Hankwitz
your favorite Rack store for free. Great brands, great prices. That's why you rack hey everyone, and welcome back to the Rich Habits podcast, a top 10 business podcast on Spotify brought to you by public.com by the end of this episode, you'll understand exactly how Wall street determines whether a stock is cheap or expensive, what the three most important valuation ratios are, and how analysts use them to build the price targets you see on CNBC and Yahoo. Finance every single day. My name is Austin Hankwitz. I'm joined by my co host, Robert Kroke. Robert is a seasoned entreprene with lifetime revenues of over 300 million, and I'm a multimillionaire in my early 30s with a background in finance and economics. As the show name might suggest, every episode we talk about rich habits as they relate to business, finance and mindset. So, Robert, what are we specifically talking about in today's episode?
- [01:46]
Robert Kroke
In today's episode of the Rich Habits Podcast, we're breaking down the framework Wall street uses to value stocks and showing you how to use it yourself. Without a Bloomberg terminal, a finance degree, or even a financial advisor, we're cover market capitalization, the three valuation ratios. Every analyst on the street relies on how to use those ratios in context so they actually mean something and how price targets are built from the ground up.
- [02:11]
Austin Hankwitz
That's right, Robert. Most investors look at a stock price and maybe think that it's cheap or expensive. Depending on the price of the stock. A $200 stock price might feel expensive. A $5 stock price might feel like a bargain. But that's the wrong way to think about it and it's a costly mistake for investors. Carvana Great example They just did a five for one stock split the other week. The stock went from $1,600 a share to about $300 a share overnight. Did the company become 80% cheaper? Did they lose all this value? No, it's the same business, same revenue, same profits, just more slices of the same pie. But I guarantee you, some people saw that $300ish dollar per share stock price and go, oh, that's more affordable now. Finally, buy this.
- [03:01]
Robert Kroke
It is crazy to think that for decades people have been asking me that, like, man, I really want to own Amazon. But it's so expensive, or Nvidia or whatever the stock is. And it's crazy because Wall street doesn't think in share prices. They think in ratios, multiples, and forward estimates. And once you understand that framework, you'll never look at a stock the same way again. So whether you're brand new to investing and trying to figure out what PE ratio even means, or you've been buying stocks for years, but never really understood how analysts arrive at their price targets. And this episode is for you. So, Austin, let's get into it and break down. What does a stock price actually tell you?
- [03:37]
Austin Hankwitz
Yeah, so a stock price is not a price tag. When you see Amazon trading at 200 something dollars a share, your brain processes that as a price tag. Like walking into a store, seeing something on a shelf and that saying $200 next to it. But a stock price is not a price tag. It's a unit price. It tells you what one single slice of the company cost. It tells you absolutely nothing about the of the company, what the company earns, or whether that price is even fair. Here's how to think about it instead. The real price tag of a company is its market capitalization. Market cap for short. The math is very simple. You take the share price so that $200 for Amazon and multiply it by the total number of shares outstanding. That is the market's current valuation for the entire business. So think about a pizza, and it's cut into 10 equal slices. If you went out and you bought a pizza for $20, cut it into 10 equal slices. Each slice of pizza is priced at that $2. That is a stock price, right? $2. Multiply by all 10 slices of pizza, you get the $20 total price tag of the pizza.
- [04:50]
Robert Kroke
So let's take that Amazon example. At $200 a share, with roughly 10.5 billion shares outstanding. That's about a $2.1 trillion company. Now take a stock trading at $3 a share with 50 million shares outstanding. That's $150 million company. So the $3 stock is not cheaper than Amazon. It's a completely different size of business. You're basically comparing a cruise ship to a kayak. So we want to break this down and give you the simple math so everyone can understand. It's not about price. It's about that valuation. This is why stock splits don't change anything about a company's value. Carvana one split the other week is a perfect example. Before the split, roughly $1600 per share, about 105 million shares outstanding and the market cap at around 168 billion. After the split, roughly $320 per share and about 525 million shares outstanding. Same market cap at $168 billion. So you see where we're going here. The share price dropped 80% and nothing changed. The pie is the same size. There are just five times as many slices.
- [06:00]
Austin Hankwitz
That's right, Robert. So whenever you have stock splits like this, or think about shares, is it. What's the price tag? What's going on here? Think in market capitalization. Don't think in share price. Very, very important. Share price tells you the cost of one unit. Market cap tells you the cost of the whole business. And what you really want to know is, what am I paying for the whole business relative to what it actually earns for its shareholders? Which brings us to our next point. We've got three very popular valuation ratios that Wall street uses. So, Robert, let's walk through those.
- [06:34]
Robert Kroke
Let's talk about the three ratios Wall street actually uses to determine if a stock is cheap or expensive. These are the PE ratio, the PS ratio, and the enterprise Value to EBITDA ratio. So let's dig in Austin and define what all of these mean. First up, the PE ratio. This is the price to earnings. This is the granddaddy of all valuation metrics. When you hear someone on CNBC say the market is trading at 21 times earning, that is what they're talking about, this P E ratio. Here's how it works. You take the company's market cap and divide it by its total earnings, its net profit after taxes. If a company has a market cap of $100 billion and earned 5 billion in profit last year, the P E ratio is 20. That means you're paying $20 for every $1 of annual profit that business generates.
- [07:24]
Austin Hankwitz
All right, so let's recap here, Robert. Take the total price tag, that market cap, and divide it by how much profit or earnings the company actually Delivered. And that is the price, the price tag to earnings, the profit ratio, PE ratio. It's very simple and it's super popular. So be sure you guys understand that. Here's a fun little homework assignment. Go find these own things for some of your favorite companies. It's super easy to find this information and begin practicing calculating some of these own ratios. So let's say you're looking at two companies in the exact same industry. Company A has a price to earnings ratio of 15. Company B has a price to earnings ratio of 40, which means you're paying almost three times as much per dollar of profits for Company B at 40 than you are at 15. That doesn't automatically mean company B is overpriced. It might instead mean the market expects company B to grow its profits significantly faster. But it does tell you that the market has very different expectations for these businesses. And you should understand those expectations before you buy either one of them.
- [08:32]
Robert Kroke
And to be clear, a high PE ratio does not automatically mean overvalued. It means the market expects high future growth. And a low PE ratio does not automatically mean it's a bargain either. It might mean earnings are declining, the industry is shrinking, or there's a problem the market has already identified. A stock can have a PE ratio of 8 and still be expensive if profits are about to fall off a cliff. So keep that in mind.
- [08:57]
Austin Hankwitz
So you mentioned the PE ratio, the PS ratio in enterprise value to ebitda. We all understand price to earnings. Again, market cap, price divided by profits, earnings, PE ratio. Let's now think about that second ratio, price to sales. Exact same framework, but instead of dividing by profits, we're dividing by revenue, which is total sales. So now you might be thinking, okay, well why would I use the price to sales ratio instead of using the price to earnings ratio? Because some of the best companies listed on the stock market aren't yet profitable. And so if you don't have profits to divide into the price there, it doesn't work. They're reinvesting everything back into the business to fuel future growth. If you only use the price to earnings ratio, you'd have no way to value an early stage Tesla before it turned profitable, or a CrowdStrike or a Palantir, or any of these high growth SaaS or biotech companies in their early years. That's why it's important to use different valuation metrics for different types of businesses.
- [10:00]
Robert Kroke
Yeah, I feel like the, the price to sales ratio is so much more important now because companies are staying private for longer and it is really difficult to put that value. But you have to look at it this way. Every company has revenue, but not every company has positive earnings. Price to sales gives you a way to compare what you're paying per dollar of top line sales, regardless of profitability. A utility company might trade at a 1 to 2 times sales, whereas a high growth AI company might trade at 15 to 20 times sales. Neither is inherently right or wrong. The question is whether growth rate justifies the premium. So a company growing revenue at 50% per year deserves a higher price to sales than one growing at 5%. And the market is pricing in that future growth.
- [10:44]
Austin Hankwitz
So we've got market cap divided by profits, price to earnings, market cap divided by total revenue, price to sales. And the third valuation metric that Wall street uses all the time is enterprise value to ebitda. This is the one that separates casual investors from people who actually understand how professionals value real businesses. This is the metric private equity firms, M and A bankers and institutional analysts lean on all the time. So let's break it down into two pieces. Enterprise value. Think of this as a true acquisition cost of an entire company. Think market cap. We already know what that is. Per share price multiplied by total shares outstanding. The cost of the pizza. The market cap plus all of the debt that exists on the business, minus any cash on the balance sheet. Because if you are literally buying a whole business, which is what acquirers do, you inherit all of their debt obligations, but you also get whatever cash is sitting in the bank. So enterprise value gives you the all in cost of ownership.
- [11:46]
Robert Kroke
That's a great breakdown of enterprise value. But let's break down EBITDA now. It is basically earnings before interest, taxes, depreciation and amortization. I know that's a mouthful. You guys see this all the time, this term. But that's what it means. So in plain English, it's what the business generates from its core operations before you factor in how it's financed, how it's taxed, and how it accounts for aging of its assets. It's the closest thing to pure operating cash flow you can get from a standard financial statement. That's the term EBITDA that you see all the time and that's the breakdown.
- [12:22]
Austin Hankwitz
So why is using this enterprise value to EBITDA metric better than price to earnings or price to sales? Because price to earnings as a valuation metric can get distorted by something called capital structure. Two identical businesses with identical operations can have wildly different price to earnings ratios just because one might have more debt or might be in a different Tax jurisdiction or maybe uses depreciation methods differently. Enterprise value to EBITDA strips out all the noise and lets you compare to how much money the company is actually making when you move away from the interest and the depreciation and the taxes and things that are kind of out of people's control. So when you hear the deal was done at 12 times each EBITDA, that's the ratio we're talking about here. The S P 500 historically trades around 15 times enterprise value to EBITDA. So think about that as your baseline when you're trying to do these calculations on your own.
- [13:22]
Robert Kroke
So, Austin, let's recap the three ratios. We have the price to earnings ratio, that tells you what you're paying per dollar of profit, best for profitable established companies. The price to sales tell you what you're paying per dollar of revenue, essential for growth companies that aren't yet profitable. And third is the enterprise value to EBITDA ratio, which tell what you're paying for the core operating business stripped of all financial engineering. And this is the gold standard for comparing companies apples to apples. Now, knowing these ratios, important, but knowing how to use them is where the real skill is. And that brings us to the most important concept in all evaluation.
- [13:59]
Austin Hankwitz
Yes, knowing how to create these different ratios. Looking at a price tag dividing earnings or dividing sales, or looking at enterprise value dividing the ebitda. All very important when you're trying to understand how Wall street value businesses and value businesses on your own. But all of that is relative. It's all relative, and it's what a lot of people get wrong. The single most valuable thing to take away from this episode is that these valuations are relative to themselves and their own industries. If someone tells you a stock has a price to earnings ratio of 30, you might say, oh, that sounds expensive. Maybe, or maybe not. A P E ratio of 30 means absolutely nothing in isolation. Valuation is never absolute. It's always, always relative. The question is, what is it relative to?
- [14:54]
Robert Kroke
Well, Wall street thinks of it in two dimensions, and I want to break those down. Dimension one is relative to the company's own history. Every company has its own normal trading range. So if a stock has traded an average PE of 40 over the past five years and right now it's sit 25, that stock is trading at a significant discount to its own historical norm. The market is pricing it lower than usual. That's a signal worth investigating because maybe the market is right and there's a problem, or maybe the market is wrong and that's where Your opportunity is.
- [15:27]
Austin Hankwitz
The reverse is also equally as important. If a company historically trades at a pe ratio of 15 and then suddenly it jumps up to 35, the market is pricing in dramatic growth. But you also need to ask yourself, is it justified? Did fundamentally change? Is there a new product? Is there a new market, a structural shift? Or is the market just getting ahead of itself and swinging back and forth like it tends to do, Like a pendulum.
- [15:54]
Robert Kroke
That is exactly what we do inside of Wall Street Favorites. We compare every stock's current PE PS and price to operating cash flow against its own five year historical averages. This is very important information. And if the current ratio is significantly below the average, that's a signal that the stock may be undervalued relative to itself. And if it's significantly above, it may be overpriced. All in Wall street favorites.
- [16:21]
Austin Hankwitz
So that was the first dimension, right? All these valuations are relative to their own history, but also to their peers. So that's the second dimension Wall street cares about. You cannot compare a technology company's price to earnings ratio to a utility company's price to earnings ratio. They're not the same type of company. It just doesn't work. Tech companies trade valuation multiples because they grow faster, they've got higher margins and the market values that growth potential. Utilities trade at lower valuation multiples because they're stable, slow growth. They're very regulated, dividend paying businesses. Right. It's kind of boring, but that's what they are. Neither is right or wrong. They're just different business profiles. So whenever you're comparing these valuations to the historical norm of the company as well as to the peers of the company, different tech, different utilities, different consumer discretionary companies. Right? You're looking at it from sort of a peer to peer perspective. You're not comparing apples to oranges.
- [17:24]
Robert Kroke
I like that breakdown. And when an analyst says Nvidia looks cheap, that doesn't mean it has a low pe. In absolute terms. They mean it looks cheap compared to other semiconductor companies or compared to its own historical range. So let's flush this out and make it concrete. Let's say Nvidia trades at roughly a PE of 55. If you just heard PE of 55, you probably think it's already wildly expensive. But let me give you some context. Two years ago, Nvidia traded at a PE above 100. So relative to its own history, it's actually gotten cheaper because earnings have grown even faster than the stock price. And relative to the broader semiconductor sector, which trades at around that 25 to 30 times earnings range. Nvidia is at a premium. But the market is telling you it expects Nvidia's growth to significantly outpace the rest of the sector. So whether you agree with that or not, it's your investment decision. But the point is you can't just look at the number in a vacuum. You have to really understand it and the totality as it relates to the historical range of each company.
- [18:28]
Austin Hankwitz
I think this is a great time to kind of bring all this back together. Right? We're talking about the stock price is not the price of the company. The price of the company is the market capitalization. There are different ways to value companies because all companies have market capitalizations. You can divide the market capitalization by annual profits. That's called price to earnings. You can divide that market capitalization by annual sales or revenue. That's called price to sales. You can also add debt, strip out cash, and then divide that enterprise value number by their adjusted ebitda, which then gives you their enterprise value to EBITDA ratio. And you can use that sort of as a broad stroke valuation metric across different types of businesses. But now it's important to take those valuation metrics we just found and compare them to their own historical averages. Historically speaking, is this company overvalued or undervalued compared to its peers? Is this company overvalued or undervalued? This is what Wall street does every single day as the stock market trades up, down, left, right, and in circles. And it's what we try and do consistently with our own portfolios, which is why we thought it was so important to talk about it during this episode and begin to hopefully open up the horizons and ideas, as some of you at home might be thinking. I don't know what this stuff is. This is so complicated. Well, it's, it's not too complicated. There's three main VAL metrics and there's two ways to kind of compare them historically into their peers. So we think a lot of the math here is easy to understand and really want to encourage you all to give it a try yourselves at home. So after you've done this math and you see in front of you, I've got the PE ratio for Apple, I know the PE ratio for Microsoft. How cool. Now the question becomes, do you agree? Do you think it's overvalued? Do you think it's undervalued? And if it's undervalued, are you going to buy more of it? If it's overvalued? Are you sitting on the sidelines? What are you doing now with this information?
- [20:29]
Robert Kroke
Austin, I really like that breakdown and I think this episode is incredibly important because there's all these terms and acronyms and everything that goes on in investing. And we just really want to educate everyone so they actually understand what they're buying. Personal finance is personal. But we also want to get you guys on board to understand better how we choose a stock, how we know if it's the right time to start dollar cost averaging, Nvidia or Micron or whatever it may be. And this episode is for all of that to help you guys really totally finally understand what all this means.
- [21:03]
Austin Hankwitz
So let's now tie it all together here and say, okay, I know these valuation metrics. I know to how, how to compare them, but how is it going to help me predict what the stock price might be in the future? And that's what the analysts on Wall street do every single day. You might turn on CNBC and hear that Goldman Sachs has initiated coverage on XYZ Company with a $250 price buy rating. Or maybe you go to Yahoo Finance or maybe in your brokerage app and you see a price target from Wall Street. Wall Street Favorites has price targets on the website. But where does that $250 price target from Goldman Sachs actually come from? Because it's not a guess. It's not just vibes. It's an exact framework that we have just walked you all through. But they project it forward.
- [21:50]
Robert Kroke
So here's what an analyst actually does. They take the three valuation ratios we just covered, the pen, the PS and the EV to EBITDA ratio. And instead of looking backward at what the company earned last year, they project forward. They estimate what the company will earn next year or the year after. And then they build these detailed financial models, essentially spreadsheets, where they forecast revenue growth, margin expansion or contraction, capital expenditures and earnings per share, all of it. Then they apply a valuation multiple to those forward estimates. And that's how they derive at these numbers.
- [22:27]
Austin Hankwitz
And you can create your own price targets. It's super simple. Let's walk through how to do it. Let's say an analyst is covering a company that earned $8 of earnings per share last year. The analyst studies the company's product pipeline, their competitive position, the trends, the management guidance, all that stuff. And they conclude that company is going to deliver $10 per share of earnings next year. So a 25% increase. So their profits, that net income are going to increase by 25% year. Now they need to determine what multiple this company deserves. They look at where the company has historically traded. So let's say that 5 year PE ratio is 22. They then look at where maybe their peers are trading. Similar companies are trading between 25 and 28. They factor in the company's growth and they think that a 25 PE ratio is fair. So now the simple math is they take that 25 and they multiply it by next year's profits. So if their profits is $10 of earnings per share, they then take that $10 of earnings per share, multiply it by 25 and they get a $250 price target. That is literally how it works. That's exactly how it all comes together. That is all Wall street is doing here with these price targets. They try and forecast what the profits, what the sales, what the EBITDA might be in the next 12 months. They then look around and see, well, what is it historically trading at? What are their peers trading out? How's this industry growing? They slap a multiple on it and then in turn they have a price target looking toward.
- [24:04]
Robert Kroke
And this is exactly why you see wildly different price targets on the same stock from analyst to analyst. One analyst thinks earnings will be $10 and their fair PE is 25 and they get a $250 price target. Another analyst is more conservative on growth estimates at $8 and uses a 20 times multiple and they get a $160 price target. Same company, same publicly available data, completely different assumptions about the future. So the consensus price target, that number you see on Y or your brokerage app, is the average of all those individual opinions. Maybe 20 to 30 analysts who each built their own model with their own estimates average together to give you that blended price that you see right there in your app.
- [24:50]
Austin Hankwitz
And that's actually what we put inside of Wall Street Favorites. We only cover companies I think, with like at least 10 or 15 different analysts take their consensus average price target, and that's what you see when you go to wallstreetfavorites.com and you look up a company by their price target and it's ranked by those upside to their price targets on Wall street favorites.com that's what we do there with the consensus price target. But here's where things actually get useful for you as an investor. When a stock is trading at 150 a share and the consensus price target is $200 a share, that represents 33% upside. That means the aggregate view of all the professional analysts that cover the company full time. People who get paid six figures to study one stock and their competitors every single day, day believe it's worth about a third more than where it trades today. So it's interesting and important to go look and see. Okay, wait a second. This company is at 150. Wall Street Favorites.com says that the consensus price target is 200. That represents 33% upside. Do I agree with that? If yes, maybe I should add it to my watch list. Maybe I should do more research and digging into what this company is and determine if it belongs a place in my own portfolio.
- [26:04]
Robert Kroke
Now, to be clear, this does not guarantee stock will reach $200. Analysts get it wrong constantly, every single day. And you should actually study these analysts as well to see what their track record is actually like. But when 25 out of 30 analysts who study a company for a living think it's worth significantly more than its current price, that's a meaningful data point that we want to follow. It tells you the weight of professional opinion is on one side and the gap between the current price and that consensus. That upside percentage is one of the most powerful screening tools individual investors access to.
- [26:39]
Austin Hankwitz
And Again, Wall Street Favorites.com ranks stocks in the S&P 500 by the highest upside. So right now I'm looking at the website. DoorDash is sits at number one with the consensus price target sitting 72% above its current stock price. Tractor supply company, Intuit, Boston Scientific Corporation. These are all companies whose consensus price targets are above 50% their current stock price. So you don't need to build models yourself. You don't need a Bloomberg terminal. You don't need mba. You just need to understand what that price target represents, which is that forward earnings times a fair multiple, and then use the gap as one input in your investment decision. Do not go see, oh, my gosh, DoorDash. You know, I'm looking over at these names. I need to go buy them all. No, you don't. No, you don't. This is one simple input in your larger investment decision. Right. If you want to invest into a single stock, you have to build conviction as to why you want to own it in the first place. With, yeah, Wall street thinks there's some meaningful upside is one part of that conviction, but it's not everything. So don't just blindly go follow what Wall street says and buy all of the different names that they think have the biggest upside, because in my opinion, that's a fool's errand.
- [27:53]
Robert Kroke
So, Austin, here's the framework in four steps for the audience Step one, stock price is not the price tag. Market capitalization is. A $200 stock can be cheaper than a $50 stock when you measure what you're actually paying for. For the who, three ratios that tell you what you're paying the price to earnings ratio for every dollar of profit, the price to sales ratio for every dollar of revenue, and that enterprise value to EBITDA for every dollar of core operating cash flow. Each one has its place depending on the type of company you're analyzing in step three.
- [28:29]
Austin Hankwitz
Those ratios only mean something in context. Compare them to the company's own five year history or their sector peers. A price to earnings ratio of 30 is Che Co. And expensive for another. So context when you're doing this is so important. And step four, those analyst price targets, they're built by projecting those ratios forward by one year. Estimated future earnings times some fair multiple equals a price target. The consensus is the average of 20 or even 30 analysts on Wall street coming together and saying, yeah, this is that consensus price target and the gap between the current stock price and that consensus price target. The upside signal you're looking for. But remember, it's only one input as you build your entire investment thesis on a single stock. It is not something that you take and go run with and just go buy all these stocks because Wall street thinks they've got high upside.
- [29:29]
Robert Kroke
If you want to see all four of these steps applied to hundreds of stocks in one place, valuation scores, analyst consensus targets, upside percentages, historical comparisons, go check out wallstreetfavorites.com we built it to give you the same Wall street analysis that profess. So check the link in the show notes and if this episode was helpful, share it with someone who's just getting started investing or someone you know who's still picking stocks based on share price. Because this is foundational stuff and the more people understand it, the better decisions they'll make in the future and the better off they'll be in their portfolios.
- [30:06]
Austin Hankwitz
Yeah, this might be one of those episodes that people have to listen to twice, write down some terms, get the notebook out, things like that, which no shame in your game if you're doing that. I think that's a great idea. But the big call out here is to ensure that you understand that none of this stuff happens in a vacuum and that the stock market is a pendulum that swings from overvalued to undervalued. If you can look at the stock price and then plot over the years the price to earnings ratio of that stock price, you will see that it swings from overvalued down to undervalued, back up to overvalued. Because humans are emotional creatures and we buy, buy, buy and we sell, sell, sell and we are all over the place. Which is why it's never have a plan and stick with it. And dollar cost average into the index funds and ETFs we talk about as well as the largest, most blue chip names in your own portfolios. So think Amazon or Google or Apple or Microsoft, right? Just buying and dollar cost averaging into things over a longer period of time and not trying to time the markets. But as you do have this information now handy in your back pocket next time you think, hmm, I really want to buy this stock or this is really interesting to me or my buddy Joe about this. Or my Aunt Martha brought this up at the dinner table. I'm going to go figure out the valuation metrics. I'm going to go figure out Wall Street's price targets. I'm going to go do research myself. That's the whole point of the show. To provide resources and information so you can go be an educated investor making educated decisions with your money.
- [31:44]
Robert Kroke
I love this episode because after today there is no more buying a stock. You don't understand why or what the company actually does because you heard about it on the Internet from some random guy who's getting paid to talk about it. So that is what this episode is all about. Arming you with all of the information to make educated decisions so you can do the best for your own portfolios. Because personal finance is personal.
- [32:08]
Austin Hankwitz
Now before we jump to the Q and A section of the episode, got to give a shout out to public.com the platform I hope that everyone uses to buy stocks on. On public you can build a multi asset portfolio of stocks, bonds, options, cryptocurrency and now generated ass which allow you to turn any idea into an investable index using artificial intelligence.
- [32:31]
Robert Kroke
And it all starts with your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20% year over year, you can literally type any prompt and put the AI to work. It screens thousands of stocks, builds a one of a kind index and even lets you back test against the S&P 500 all with just a few clicks.
- [32:52]
Austin Hankwitz
Generated assets are like ETFs but with infinite possibilities. They're completely customizable. They're based on your your thesis, not someone else's. So go to public.com rich habits and earn an uncapped 1% bonus when you transfer your portfolio. That's public.com rich habits paid for by Public Investing.
- [33:09]
Robert Kroke
Full disclosure in the Podcast Description As
- [33:12]
Austin Hankwitz
a reminder, we close off every episode answering your questions. You can ask us questions on Instagram via DM @Rich Habits Podcast or you can email us your questions via email at rich habits podcastmail.com we get hundreds of questions every week, so if you don't answer your question, give us some slack here. But we've got three great questions in this episode. The first one comes from Arturo. Arturo emailed us and said hello Austin and Robert, thank you for answering my last question about direct indexing. You're welcome Arturo. That's awesome to hear. Your insights were very useful in my decision making. I have a question this time regarding the Hype stock of vcx. A few episodes after the VCX ticker went live, Austin said something along the lines of I hope you guys didn't buy the hype. Which leads me to believe that there is some pattern recognition happening. Likely from your experience and knowledge that this was indeed a hype case, maybe a bubble bursting. My question is how do you distinguish between a short term speculative bubble like I think the one VCX experienced in genuine growth potential? What a great question. So yes, let's talk about VCX for a second. VCX is the public ticker for private tech. It's the Fundrise Innovation Fund. They own equity and Anthropic, OpenAI Databricks I think Anduril like a bunch of incredible privately held companies that are growing like a weed. Anthropic has grown from 10 billion to $45 billion in annualized revenue just in the last five months. These companies are the next frontier as it relates to the next trillion plus dollar companies on the stock market. But the unfortunate problem is they're all privately held. Anthropic is still private. OpenAI is still private. Anduril is still private. Databricks is still private. Which means retail investors, investors can't invest in or buy exposure or get any sort of equity in these businesses easily through the stock market. So what happened was Ben Miller came on the show, the CEO of Fundrise, and he took his Innovation Fund, which is their venture fund. They essentially put it on the stock market, listed it and then said now people can buy VCX and get exposure in their portfolios to the underlying equity that the VCX venture portfolio has in these businesses. The problem was it became a meme stock in people all over X and Reddit and Instagram or wherever online. They just bought this up into 500 a share Ben came on the show and said, listen, the biggest risk to this is that this portfolio has something called a net asset value of about $20 a share at the time of that recording. Now that has changed a little bit and I'll allude to that in a second. But it's worth 20 bucks a share on paper and that's why they listed it at about $20 a share. But what happened was these retail investors got really excited about owning Anthropic in their portfolios and open and their brokerage accounts. They just kept buy, buy, buy, buy, buy, and it went up like crazy. And why that's important is because if you think about the math of this stuff, you can go kind of back into, wait a second, Anthropic is Now worth this, OpenAI is worth that, and Drill is worth this. I can kind of figure out if I combine them all together here, what's the price tag, that market cap of it all and, and how you should think about that and then back into a stock price. Right now that market cap price tag is somewhere around, I don't know, 80 to one. Anthropic is now worth well over one and a half trillion and OpenAI is worth over a trillion. So it's a little different than when it listed, but it certainly isn't worth 500 a share or even at the 200, $300 a share it's worth. It's trading at today. And so to answer your question very, very clearly here, how do we recognize and distinguish between short term speculative bubbles like the one that VCX experienced there and genuine growth potential? It all comes back to those forward expectations that we talked about in this episode. Wall street is saying, hey, I think Nvidia's profits are going to skyrocket, go through the moon. Micron's profits are going to skyrocket, go to the moon. And 10x their profits because of all the demand for the data centers, then yeah, fundamentally speaking, if their profits go up by 10x, the stock price is justified to follow it. But on the other side of that token, you can think of an Oracle. Oracle said, hey, we've got these remaining performance obligations of half a trillion dollars. Go put my stock price up to the moon. And so retail investors, boom, that went up like 300% or something. Profits didn't follow. All of that was speculation. And Oracle stock price came crashing back down. When a stock price goes vertical, you have to ask yourself, is this justified with fundamental progress? Is cash flow and profits and, and real money being generated here or is it all speculation, is it not justified? Because people are just getting excited for whatever reason it might be and they're just bidding the stock price up or the VCX price or whatever it is up, up, up, up, up. Because that's what happened with VCX and Oracle and a lot of these other names. Retail investors get really excited and they buy, buy, buy without actually seeing profits move up with that excitement. So being able to see the difference and figuring out are profits actually, actually moving? If yes, maybe it's justified. If no, be careful. See on the way down, what a great breakdown, Austin.
- [38:33]
Robert Kroke
I feel like we could just talk about this for hours because we do live in a hype cycle. Everywhere you turn, something is getting hyped up. I mean, just a couple weeks ago, allbirds went from a shoe company that's failing with hundreds of millions in debt to all of a sudden they're an AI company the next day and the stock shot up 40%. That is not what we're trying to do here. We're trying to teach people to avoid those hype cycles and really at genuine growth potential. Like in this question and everything we laid out in this episode to teach people how to be real investors and not try to gamble on these meme stocks in all of the hype that's out there in the market.
- [39:11]
Austin Hankwitz
Yeah, the Allbirds example is a great one because you're totally right. It was trading at $2 and 50 cents a share as a failing business. It jumped up to $20 a share, so 10x overnight and now it's back down to $4 a share. And the reason you saw that up and down is because people speculated, they got excited, they think, oh, it's going to make all this new money. We're going to. But unless profits or Ebida or sales or these valuation metrics we just talked about in this episode actually show up, it's all just hype and speculation and bubbles that that's all this is. And before we move on, I just want to add one more thing about vcx, right? Vx. VCX is this four year old fund. It's a venture fund that FundRise made in 2022. Then they said, let's take our venture fund and list it on the stock market. And so they did that at about $20 a share. And now what investors are doing is they're speculating what 20% ownership or 22% ownership of Anthropic or OpenAI or Andre or Databricks. They're speculating what that ownership actually translates to. In market net asset asset value. And that's why you see wild movements of price between the 20 to 500 to 80 to 275. As markets are trying to figure out, is Anthropic really a 1 trillion company or are they a 5 trillion company in disguise? Are they. Is OpenAI really a 1 trillion company or is it a $500 billion company with this lawsuit? I don't know. And so that's why you see crazy volatility in things like this. Now let's jump to our next question coming from Luciano on Instagram. Luciano says hello. My name's Luciano. I moved a few years ago to the United States and I found your show and I started listening and it's helped me a lot to understand the US Markets. I'm looking for ideas about actions to take to protect my family in case of death, a will, a trust, other actions needed to make sure I leave my loved ones protected and covered. Thank you for the amazing show. Robert, this is all you.
- [41:12]
Robert Kroke
Yeah, Luciano, great question. You should do all of the above because you want to make sure the earlier the better you you have any real estate in a holding company through an llc, you want to make sure you have that trust in place. It's probably going to be a revocable trust, but research irrevocable trust as well, because it's going to depend on what all you hold, what assets and what you're trying to accomplish. And it also depends on do you have siblings that are going to be sharing in these equities and these assets upon passing. So I think you're on the right track. I would engage with an estate attorney to help you figure it all out. But to sit, save yourself a lot of money, go in and feed, chat, GPT or Gemini, all the information about your situation, your finances, what you own, your investments, and get some details there first and then go meet with this estate attorney to help you figure it all out and make sure you're covered on all aspects. Because the last thing anyone listening wants to do is leave it up to chance. Because if your property's in your personal name and you pass and it goes into probate, it could take years and a $10,000 fee to get through prob probate and get that to your siblings or your daughter or whoever it may be to protect yourself. So always make sure you do these things with the LLCs, the holding company, and possibly a living trust. So all of these are important. Do your research first, you're definitely on the right track. And then hire A good estate attorney to get it all dialed in.
- [42:43]
Austin Hankwitz
That's great feedback. I think the only thing I will add is the insurance side of it all. If you do not have term life insurance, highly recommendations doing that. All term life insurance means is you will have a nest egg to give to your beneficiary to help supplement their lifestyle as they lose your income because you are no longer around. So if you are the breadwinner of the family, you're making $100,000 a year. Normally about 15 to 20 times annual income is where you should take out coverage on. So about 1.5 to $2 million of a term life insurance policy. It'll cost you less than $30 a month. I think I pay that for a 2 million dollar term life insurance policy that I have right now. I got it from shiance.com rich habits shout out Russ and Robin. They are incredible friends. They created this great term life insurance company. S U R I a n c e.com rich habits there's also a link in the show notes below for that. But term life insurance, so, so, so important. They're just brokers. They just connect you with, you know, the ethos of the world and the ladders and all the other different brokers that are out there to sell you term life insurance. So affordable. Skip the whole life insurance. Skip the indexed universal life insurance. It's not worth it. Term life insurance is what you need. The other thing, I'll add umbrella insurance. If your net worth, I mean you just moved to the United States but maybe you're very wealthy. As your net worth climbs over time, you should have umbrella insurance which is also very affordable. I think I pay a thousand dollars a year for like a 10 million dollar policy. But having umbrella insurance means that if you got got into a, you know, at fault for a tragic car accident or something terrible happened on my boat or you know, something very, very bad, accidental, but someone is injured or bodily harm or death and I get sued or something happens here I've got now this sort of extra umbrella up to $10 million that I will be able to lean on as umbrella insurance. Robert, how big is your umbrella insurance policy?
- [44:46]
Robert Kroke
I have $5 million.
- [44:47]
Austin Hankwitz
$5 million and it's, it's affordable. It's like under $1,000 a year.
- [44:51]
Robert Kroke
Yep. And I've had it for decades, never had to use it. But I'll tell you what, it is one of the best policies I have to help me sleep at night to know that if somebody does something silly or tries to pierce the Corporate veil and come after my personal assets that I'm covered. So that is a great call out that I didn't mention.
- [45:12]
Austin Hankwitz
So our last question comes from Justin J. On Instagram. Justin says, hey, quick question. I work for Amazon, and I'm blessed to receive stocks for the company. I'm 26, married, and I have a child on the way. Trying to do my best to continue to invest even with everything going on. I have a salary of $100,000 and my wife does not work. I receive restricted stock units from my company and I have a hundred of them at the moment. It's worth about $28,000 at current market prices. I've got $15,000 invested into a brokerage account, mainly in Voo, QQQ, and VTI. My question is, do I sell my RSUs so I can diversify my portfolio better? And if I do, how does capital gains taxes work? So love this question. Justin, glad you're working at Amazon. Congrats on the child. So, so exciting. You have a growing family. You're just, you're. You're doing it, man. That's awesome. In my opinion, I think of RSUs, especially when you're young here and you're still building your base as part of your compensation. So if I were you, I would sell the RSUs, take the $28,000, pay your taxes, and then I would dump all that money into my Roth IRA, into the index funds and ETFs we talk about. And then I'd also, whatever's left, make sure that I put that in my brokerage account, my bridge account on public.com. i like Voo and QQQ, maybe even add AIQ or VGT or maybe DIA, a couple other ETFs in there for you. But I think until you have that $100,000 base built, you should be thinking about your use as a way to just increase your annual compensation and then take that to begin building your base in a more aggressive manner. And then once your base is built and you've got 100, 200, $300,000 in the markets, then you can say, yeah, I could have $30,000 invested in Amazon or 15,000. You know, it's only 5% of my portfolio or 6%, whatever that number is at the time. But the thing you don't want, and I've seen this all the time, is people work at the same company their whole lives, and it's a good company, like a Johnson and Johnson or a Proctor Gamble or a, you know, Home Depot. So the stock Price has gone up over a long period of time, but their whole nest egg is in the stock. And you get one earnings call, that's bad. Or you get a CEO departure, or you get one, you know, Campbell soup hot mic situation, and the stock price goes down by 30% and your nest egg, you're out $700,000 because something out of your control. Now, yes, the s and P500 could also go down and could also pull you down by $700,000 dollars, but for the stock market to go down 30%, we need something crazy to happen. For a Campbell's Chicken Noodle Soup to go down by 30% or an Uber to go down by 30%, you know, you just need one or two weird things to happen in a short period of time and your nest egg is evaporating.
- [48:02]
Robert Kroke
I love that breakdown, especially because right now his Amazon position through these RSUs is a major part of his net worth. So I love exactly that playbook of, of what you laid out for this question to really get that base built and move on.
- [48:17]
Austin Hankwitz
Yeah, the important thing when it comes here about those taxes too, with these RSUs is because it's like part of your annual compensation, they will be taxed as ordinary income. So don't be thinking 15 or 20%, like flat rate or whatever it might be. I guess 15% for you, because you're under that half a million threshold, you will pay ordinary income tax on this $28,000, which is fine. I mean, that's what it is. They just pretty much gave you this money. So just set that aside, do some math, work with Gemini or whatever you talk to here to figure out your tax situation and make sure you've got that money set aside. So in April of 2027. Wow, 2027. When April 2027 comes along, reflecting upon 2026 tax year, you're not hit with a, you know, $7,000 tax bill or whatever it might be for you that's going to surprise you and throw you off your kilter.
- [49:04]
Robert Kroke
What a great episode, Austin. This was long overdue. Breaking all of this down, how we do it, the magic behind the curtain, to make really good choices with your money and your investment strategies. So I really, really enjoyed this and I hope people do as well.
- [49:21]
Austin Hankwitz
Everybody, thanks so much for tuning in to this week's episode of the Rich Habits podcast. Be sure to go check out wallstreetfavorites.com we built it. It's powerful. We believe in it. Ton of free stuff over there, ton of paid stuff over there. Ton of value regardless of whatever's got going on. We love wall street favorites.com and we're so proud to have built it for you all. And yes, go back this episode again, hit the play pause button. You know, write down the definitions, go like, do what you got to do to learn from this episode and your homework is to take what you learned and actually apply it. Go look at the price to earnings ratio of Apple, Go look at the price to sales ratio of Meta or Amazon and look at the historical averages and see is it trading above or below? Compare it to its peers. Is it overvalued or undervalued compared to its peers in the industry as a whole? Because once you begin to understand these valuation metrics, the stock market becomes this ever evolving, exciting, wealth building, you know, mechanism that is just so, so, so intriguing and exciting. To learn more about, you've been awakened, as Robert and I have both been when it comes to these valuation metrics. We love running the numbers and figuring out is this an opportunity? Is Wall street missing this? Right? It's just, it's so much fun.
- [50:38]
Robert Kroke
Thanks everyone and we'll see you on Thursday day. Some Follow the noise. Bloomberg follows the money. Whether it's the funds fueling AI or crypto's trillion dollar swings, there's a money
- [51:14]
Austin Hankwitz
side to every story.
- [51:16]
Robert Kroke
Get the money side of the story. Subscribe now@bloomberg.com
- [51:23]
Austin Hankwitz
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Robert Kroke
But that's weird.
- [51:38]
Austin Hankwitz
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