That is dedicated to those of you which invest in individual stocks. I wants to share together with you the ways I have tried personally over the years to pick out stocks which i have found to become consistently profitable in actual trading. I like to work with a blend of fundamental and technical analysis for selecting stocks. My experience indicates that successful stock selection involves two steps:
1. Select a share with all the fundamental analysis presented then
2. Confirm that the stock is surely an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being across the 100-Day EMA
This two-step process raises the odds that the stock you decide on will probably be profitable. It also provides a transmission to sell Automatic Income Method that has not performed as expected if it’s 50-Day EMA drops below its 100-Day EMA. It is another useful way of selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis may be the study of economic data like earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to assist select securities for future price appreciation. Over recent years I have tried personally many options for measuring a company’s growth rate to try to predict its stock’s future price performance. I have used methods like earnings growth and return on equity. I have found these methods are not always reliable or predictive.
Earning Growth
For example, corporate net earnings are be subject to vague bookkeeping practices like depreciation, cashflow, inventory adjustment and reserves. These are all be subject to interpretation by accountants. Today more than ever, corporations are under increasing pressure to overpower analyst’s earnings estimates which leads to more aggressive accounting interpretations. Some corporations take special “one time” write-offs on the balance sheet for things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed product development, etc. Many times these write-offs are not reflected like a drag on earnings growth but show up like a footnote on a financial report. These “one time” write-offs occur with increased frequency than you might expect. Many businesses that from the Dow Jones Industrial Average have such write-offs.
Return on Equity
One other indicator, which has been found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a higher return on equity with successful corporate management that is certainly maximizing shareholder value (the better the ROE the better).
Which company is a lot more successful?
Coca-Cola (KO) with a Return on Equity of 46% or
Merrill Lynch (MER) with a Return on Equity of 18%
The reply is Merrill Lynch by any measure. But Coca-Cola features a higher ROE. How is that this possible?
Return on equity is calculated by dividing a company’s net income by stockholder’s equity. Coca-Cola can be so over valued the reason is stockholder’s equity is simply comparable to about 5% in the total rate in the company. The stockholder equity can be so small that nearly anywhere of net income will produce a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity comparable to 42% in the rate in the company and needs a much higher net income figure to produce a comparable ROE. My point is always that ROE won’t compare apples to apples then is not an good relative indicator in comparing company performance.
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