What to Look for When Trading US Stocks

In the past few weeks, I've met at least five people who immediately told me: "The PE of such-and-such stock is too high."

PE is just one of many indicators. Different types of stocks require different metrics. They can be broadly classified into: Growth Stocks, Value Stocks, Defensive/Dividend Stocks, Cyclical Stocks, and Monopoly Stocks. Let's look at how to trade US stocks together.

Growth Stocks

I know everyone is anxious to see how to trade optical modules and storage, but let's take it one by one. Growth stocks are the most important type of rising stocks, and this is the key valuation shift behind the skyrocketing storage sector in this cycle. The core of growth stocks is that "future earnings are most important." These companies are usually in a stage where industry penetration is rapidly increasing; their business models are proven, but market space is far from saturated. Investors are not buying current profits, but the ability to expand earnings over the next several years.

For growth stocks, revenue growth is the primary metric because revenue is the source of subsequent profit and cash flow. High gross margins determine the potential for future profit release—only high-margin growth is truly valuable. In the SaaS field, the Rule of 40 (Revenue Growth Rate + Free Cash Flow Margin > 40%) has become a classic standard for measuring the balance between growth quality and profitability.

Since earnings are often unstable or even negative during high-speed expansion, PE indicators often fail at this stage, making PS (Price-to-Sales) the core valuation tool. It essentially prices future profit margins rather than current profits.

Typical cases include:

• Nvidia (Early AI cycle) TTM PE: (Approx. 28–50x in 2018, 21–51x in 2019, 52–82x in 2020, 70–78x in 2021)
• Amazon (E-commerce expansion period) TTM PE: 34x–107x (Reached 107x in 2007, mostly 45–71x between 2008–2010)
• Shopify TTM PE: Negative or extremely high most of the time (Negative in 2019, as high as 400x+ in 2020)
• Snowflake
• Palantir TTM PE: Approx. 170–265x in 2023 Forward PE: 33x–200x+ (Approx. 88x in 2021, 34x in 2022, 58x in 2023)

Friends who love looking at PE, come here to be scolded. If you only focused on PE, you would have gradually liquidated Nvidia between 2018 and 2021. For great companies like PLTR, TSLA, and RKLB, PE ratios have also been ridiculously high.

So, what should you look for in growth stocks?

1. Revenue Growth: Revenue growth is the most important indicator for growth stocks. For growth companies, revenue growth is the source of all subsequent value creation.
2. Gross Margin: High growth isn't necessarily valuable; high-margin growth is. Gross margin determines the space for future profit release.
3. PS (Price-to-Sales) - The core valuation metric for growth stocks: PS = Market Cap ÷ Annual Revenue (Sales) PE often fails during high-speed expansion. PS essentially prices future profit margins. When companies are expanding channels to grab market share, they often value sales over short-term profitability. The Price Ratio family (PS, PE, PB, and their variants) needs to be viewed comparatively: compare them with industry averages and historical periods. Don't just look at the number in isolation; I'll explain this logic in detail in the PE section.

Value Stocks

Value stocks are in a mature stage with limited growth space but stable and predictable profitability. The market usually gives them lower valuations, and investors buy stable cash flows at a discount. Here, PE is the primary reference, requiring multi-dimensional comparisons with historical PE, industry average PE, and Forward PE.

More importantly, P/FCF (Price to Free Cash Flow) reflects the company's discretionary cash more accurately by deducting capital expenditures and is harder to manipulate with accounting tricks than PE. ROIC (Return on Invested Capital) further measures capital allocation efficiency; companies that maintain high ROIC long-term often have sustainable value creation capabilities. Additionally, Earnings Yield (1/PE) can be directly compared with bond yields, providing a cross-asset valuation anchor for value stocks (Note: these are the dimensions Warren Buffett likes most).

Typical cases:

• Coca-Cola
• JPMorgan
• Exxon
• Pfizer

Core indicators:

1. PE: The most important indicator for value stocks. I find many people rush to say PE is high or low without even knowing the different types of PE indicators, let alone how they are calculated. This is unacceptable for a professional investor. The PE family includes:

Static PE: Current Price vs. Last full fiscal year profit

Historical PE: Historical PE range

Industry PE: Industry average PE

Forward PE: Current Price vs. Forecasted profit for the next 12 months

TTM: Current Price vs. Last 12 months of profit. This is the commonly used rolling PE.

Among these, TTM PE and Forward PE are the most common. TTM evaluates current valuation, while Forward evaluates valuation based on discounted future earnings. However, Forward PE earnings are estimates and can be inaccurate.

We often hear that Forward PE for Samsung or Hynix is very low, while some optical module valuations are very high. Samsung and Hynix are being revalued from cyclical stocks to growth stocks; this massive valuation shift is driving the stock price up, which I will explain later.

1. P/FCF: P/FCF = Market Cap / Free Cash Flow More accurate than PE because cash flow is harder to manipulate than profit. It essentially answers how much the market is willing to pay for every $1 of real cash flow. The inverse of Market Cap / Free Cash Flow is called FCF Yield, which leads to the DCF (Discounted Cash Flow) model. Since this isn't a corporate finance class, I won't go into detail.
2. ROIC: ROIC = NOPAT / Invested Capital. Where NOPAT = EBIT × (1 - Tax Rate). This measures capital allocation efficiency. Long-term high ROIC usually means value creation. Just remember it stands for Return on Invested Capital.
3. Earnings Yield: Earnings Yield = Net Profit / Market Cap. Used for comparison with bond yields. It is the inverse of PE. Subtracting the Treasury rate from this yield gives you the risk premium level.

Cyclical Stocks

Earnings for cyclical stocks are highly correlated with macro-economic cycles, including energy, shipping, semiconductors, and steel. Their earnings fluctuate wildly, often making PE indicators misleading. EV/EBITDA is more useful here because it excludes the impact of depreciation and amortization, bringing it closer to operating cash flow. Asset replacement costs, inventory cycles, and commodity price trends are often more predictive than the financial reports themselves.

The biggest trap with cyclical stocks is: Low PE often appears at the peak of a cycle, while high PE might correspond to a reversal opportunity at the bottom of earnings. Therefore, judging the current cycle stage is far more important than static multiples.

Representative companies:

• Hynix (Memory cycle)
• Micron (Memory cycle)
• ExxonMobil (Energy cycle)
• Muyuan Foods (Hog cycle), Vanke (Real estate cycle)
• MSTR (Crypto cycle)

Core indicators:

1. EV/EBITDA: More reliable than PE because earnings can fluctuate wildly. EV/EBITDA = Enterprise Value ÷ EBITDA; EBITDA = Operating Profit (EBIT) + Depreciation (D&A) + Amortization.
2. Asset Replacement Value: Especially applicable to resource industries. Asset Replacement Value = Cost to rebuild assets Depreciation adjustment Resource reserve value. This is a classic energy cycle valuation formula.
3. Inventory Cycle: Inventory Days = Average Inventory ÷ Cost of Goods Sold × 365. A classic indicator for the semiconductor industry; the inventory cycle usually leads the stock price by 6-12 months.
4. Commodity Prices: Often more important than financial reports. For companies in commodity cycles, macro-economic laws of commodities are the source of stock valuation. Examples:
5. Muyuan Foods' hog cycle: Stock price follows hog futures.
6. Precious metals trading: The hot market last year drove gold and copper mining companies, following commodity prices.
7. MicroStrategy (MSTR): Operates in the Bitcoin commodity cycle; its stock price naturally follows Bitcoin.

Cyclical stocks are easily overlooked. We are used to using PE and earnings, which leads to confusion.

A classic example is the current memory cycle. Before the rally, Samsung and Hynix had single-digit PEs, and even now, their Forward PEs are single-digit. Why did no one notice such good companies before? Here is the answer:

1. Memory belongs to cyclical stocks. Valuation for cyclical stocks doesn't look at PE but at the indicators mentioned above. Using PE is fundamentally wrong.

1. Due to exchange controls in Korea and non-transparent domestic stock policies, these companies had a "Korea discount," leading to cheaper valuations compared to global peers, with PEs around 7.

However, if we look at MSTR, its PE is ridiculously high, or it may not even have earnings. Why such a difference in the same cyclical category? The answer is using the wrong indicators. Different types of companies require different valuation methods. If you only use one indicator, you are still an outsider.

Defensive/Dividend Stocks

Defensive stocks are like actuarial-type stocks for the older generation. I'll keep this brief as I assume most people in this hot market don't want to hear about small percentages of cash flow and dividend algorithms.

Defensive or income stocks maintain earnings resilience during recessions, mainly in consumer staples, healthcare, and utilities. Investors buy certainty, not high growth. Their valuation logic is closer to the bond market; thus, dividend yield is a major source of return. Stability of free cash flow and earnings volatility are core considerations. For REITs, AFFO (Adjusted Funds From Operations) is a more realistic performance measure than net profit.

Debt coverage (especially interest coverage ratio) is also key, reflecting the financial buffer under pressure. The investment logic is essentially buying a "certainty premium." The interest rate environment significantly affects these stocks; debt duration and interest coverage need focus. Overall, dividend stocks are "fixed-income-like" assets in the stock market.

Representative companies:

• Coca-Cola
• Procter & Gamble
• Costco
• Johnson & Johnson

Monopoly Stocks

Monopoly stocks (Moat Stocks) possess lasting competitive advantages from network effects, brand barriers, technical barriers, regulatory barriers, or economies of scale. These advantages make time an ally. Valuation for monopoly companies is more qualitative than quantitative. There is more price room because once a monopoly platform is established, the advantage in the industrial chain is hard to calculate.

Narrow monopolies require hard advantages: 1. Government relations. 2. Technological leadership. Broad monopolies include competitive advantages that are hard to topple quickly, like brand moats, scarcity, and dominant market share.

Representative companies:

Broad Moat:

• Apple (Brand ecosystem)
• Visa (Payment network effect)
• Nvidia (70% market share in AI training, market cap nearly 50% of first-tier AI companies combined)
• Circle (Scarcity, the only stablecoin stock. If Tether went public, this status would be challenged)

Narrow Moat:

• Saudi Aramco (National resources, unique global oil advantage)
• PLTR (Government relationship monopoly)
• ASML (Technological monopoly, the only one capable of mass-producing EUV lithography machines)
• Hynix (New dark horse with HBM technology monopoly)
• Various Chinese state-owned enterprises with special status. For example, Chinese banks are more willing to lend to SOEs than private enterprises, which is an irreplaceable advantage.

Core indicators:

1. Gross Margin Stability: Gross Margin = (Revenue - COGS) ÷ Revenue. Competitive industries experience price wars that compress margins. If margins are stable for decades, it means competitors can't grab market share by cutting prices. This indicates strong pricing power.
2. Market Share: Market Share = Company Revenue ÷ Total Industry Revenue. Broadly, the most intuitive monopoly is a large market share. One company eating the whole market is a monopoly, like oil companies in the Rockefeller era.
3. Pricing Power: Whether customers are still willing to buy after a price increase. This is the strongest indicator, though it can have noise. A classic example is OPEC: a monopoly organization that controls prices by deciding production levels. Why is there noise? Different market environments mean this doesn't always apply. In competitive China, even if WeChat announced it would charge fees tomorrow, countless apps would replace it. In the industrial chain, pricing power often lies in "chokehold" or bottleneck segments. This is the story of the current memory cycle: the entire chip production is stuck at the memory stage, giving them the strongest pricing power. However, having pricing power doesn't always mean they will raise prices to get more profit; often, these companies choose to stay put even with the right to raise prices.

The core logic of monopoly stocks is: when we judge a company has monopoly power, we need to add a monopoly premium to its valuation. We must return to industrial chain and qualitative analysis. In this special type, many indicators, including PE and revenue, can be misleading.

Finally, there are sentiment companies, or Meme Stocks. Many companies enter a sentiment phase at the end of violent fluctuations. I won't detail them here as I've written many articles on how to operate in sentiment markets.

The stock market is mature, highly competitive, and professional, with many top smart people involved. Knowing these characteristics, we find that each company's valuation drivers are unique. The indicators mentioned above are just a broad perspective. In hedge fund offices in Miami's Brickell Bay, researchers tear down products and track every part and production line. It's far more than just gross margin or PE.

There is much homework to do for deep research into US stocks, but the valuation logic introduced here provides a clearer classification and mindset. Next, I will write more about trading logic.

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