That is committed to those of you who want to spend money on individual stocks. I want to share with you the ways I have used through the years to select stocks which i have found being consistently profitable in actual trading. I like to utilize a mixture of fundamental and technical analysis for choosing stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a stock while using the fundamental analysis presented then
2. Confirm that this stock is an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being over the 100-Day EMA
This two-step process boosts the odds that this stock you select is going to be profitable. It offers a signal to sell ETFs which has not performed not surprisingly if it’s 50-Day EMA drops below its 100-Day EMA. It is also a useful way of selecting stocks for covered call writing, quantity strategy.
Fundamental Analysis
Fundamental analysis will be the study of financial data such as earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to aid select securities for future price appreciation. Over time I have used many options for measuring a company’s growth rate so as to predict its stock’s future price performance. I manipulate methods such as earnings growth and return on equity. I have found the methods are certainly not always reliable or predictive.
Earning Growth
As an example, corporate net earnings are be subject to vague bookkeeping practices such as depreciation, income, inventory adjustment and reserves. These are all be subject to interpretation by accountants. Today inside your, corporations are under increasing pressure to beat analyst’s earnings estimates which leads to more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their balance sheet for specific things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed product, etc. Many times these write-offs are certainly not reflected being a drag on earnings growth but instead arrive being a footnote on a financial report. These “one time” write-offs occur with increased frequency than you could possibly expect. Many businesses that make up the Dow Jones Industrial Average have got such write-offs.
Return on Equity
Another popular indicator, which i’ve 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’s maximizing shareholder value (the better the ROE the higher).
Recognise the business 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 answer then is Merrill Lynch by measure. But Coca-Cola includes a higher ROE. How is this possible?
Return on equity is calculated by dividing a company’s post tax profit by stockholder’s equity. Coca-Cola is so over valued that it is stockholder’s equity is only comparable to about 5% with the total market price with the company. The stockholder equity is so small that almost anywhere of post tax profit will develop a favorable ROE.
Merrill Lynch however, has stockholder’s equity comparable to 42% with the market price with the company and needs a much higher post tax profit figure to make a comparable ROE. My point is the fact that ROE does not compare apples to apples so therefore is not an good relative indicator in comparing company performance.
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