The new year has a funny way of making investors feel both optimistic and anxious. I’m optimistic because the calendar will be reset. It makes me anxious because I might “take inventory” of what I need to do to get better. That’s why a worthwhile New Year’s resolution isn’t about “picking better stocks.” It’s about following a repeatable investment process. Start with stock selection and choose based on evidence. The purpose of data analysis is not to discover magical metrics. It’s about identifying a small number of factors that have shown persistence, understanding over what time frames they tend to work, and combining them in a way that reduces dependence on a single signal. Many technical factors (trends, momentum, relative strength) tend to become more beneficial over weeks and months. Therefore, it is a good time to buy and sell. At the same time, fundamentals (profitability, balance sheet strength, cash flow, sustained growth) tend to be more informative over several quarters to years, and can help identify businesses worth investing in over the long term. The actual process uses fundamentals to define the “world of quality” and technicals to determine “timing and risk.” Finally, expect imperfection. Be prepared to make mistakes, recognize them, and move on without fear or favor. A good place to start is with a three-stage filter. Step 1: “Is the business strong enough to own?” Look for sustained sales growth, healthy profit margins, improved return on equity, increased free cash flow, and balance sheet flexibility. I like to start with fundamentals because it gives me a list of companies worth keeping an eye on, even if it’s not the right time or price to buy. You will notice that we have not listed commonly used valuation metrics such as Price to Earnings and Enterprise Value to EBITDA at this stage. Because these are measures of price, not fundamental strengths or weaknesses of the company. Step 2: Are stock prices behaving as if investors agree? There is truth in prices. Weak price movements can indicate irrational investors are panicking, but it can also indicate something lurking that isn’t reflected in the financial statements. Requires price to be above major moving averages and/or above its sector or benchmark. Step 3: Is the story already too crowded? This last step can help you avoid chasing expensive stocks and may help you identify stocks that have become too cheap. Just as many diets include “cheat days” (generally aimed at making a healthy lifestyle more sustainable), you can also allocate a portion of your portfolio (sometimes called a “sleeve”) to “special situations”, instances where a stock may not exactly meet your filter, but is still worth a moderate bet and helps satisfy your desire to paint outside the lines on a regular basis. However, today is not a “cheat day”. We identified 98 stocks by filtering for publicly traded US companies with average five-year earnings growth greater than 5% (approximate real inflation since February 2021), EPS growth greater than 8%, ROIC greater than 12%, and above the 50-day and 200-day moving averages. One of the lesser known ones is ePlus Inc. (PLUS). A “quiet compounder” of enterprise IT, ePlus provides IT hardware and software solutions to businesses looking to modernize their infrastructure, strengthen cybersecurity, move workloads to the cloud, build data center capacity, and, of course, incorporate AI. Over the past five years, the company has delivered 7% growth in sales from continuing operations and 12% growth in diluted EPS. Despite being in a tough trading range since Nov. 10, the stock rose about 20% this quarter on strong results. While I like the idea of trading stocks and “buying writes” (buying stocks and selling upside calls on them) even after a 20% increase, there is an important caveat. Due to the wide range of PLUS option prices, this requires: Understand how options should be priced based on price movements of the underlying stock. Use of limit orders. Knowing how the price of an option changes as the underlying stock price changes. The fair value of a $95 strike call expiring on February 20th, with a stock price of about $90 (Friday’s closing price was $90.03), is about $2.70 per contract (a total premium of $270, assuming each contract represents 100 shares). This option has 38 deltas. This means that the value of the call varies by approximately 38% with PLUS stock price. If the stock price increases by $1, the value of that call increases by 38 cents. If the stock price falls by $1, all else being equal, the value of those calls will fall by about $0.38. Investors interested in buy-write potential can buy the stock and place a limit order to sell for $2.70 for every 100 shares they bought on February 1st at $95, assuming they buy the stock at the current price of around $90. Investors need to exercise patience when there is a wide range of option prices. Use a limit order and wait with the understanding that it may not be executed (executed). it’s okay. It is better to wait for the right price and risk not selling the option than to enter a market order and sell the option at the wrong price. Most brokerage platforms require investors to be able to enter this trade as a single order. Assuming your platform does so, your total net debit will be $8,730 (excluding fees). $90 per 100 shares = $9,000 minus $270 net credit for selling 1 call at $2.70. Disclosure: None. 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