That is committed to those of you who wish to invest in individual stocks. I want to share with you the strategy I have used in the past to choose stocks that I have found to get consistently profitable in actual trading. I love to utilize a mixture of fundamental and technical analysis for selecting stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a standard while using the fundamental analysis presented then
2. Confirm that the stock is surely an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process raises the odds that the stock you choose will probably be profitable. It offers a transmission to market Chuck Hughes that has not performed needlessly to say if it’s 50-Day EMA drops below its 100-Day EMA. It is another useful means for selecting stocks for covered call writing, quantity strategy.
Fundamental Analysis
Fundamental analysis is the study of economic data for example earnings, dividends and your money flow, which influence the pricing of securities. I use fundamental analysis to assist select securities for future price appreciation. Over recent years I have used many means of measuring a company’s growth rate in an attempt to predict its stock’s future price performance. I purchased methods for example earnings growth and return on equity. I have found that these methods are certainly not always reliable or predictive.
Earning Growth
For example, corporate net earnings are at the mercy of vague bookkeeping practices for example depreciation, income, inventory adjustment and reserves. These are all at the mercy of interpretation by accountants. Today as part of your, corporations are under increasing pressure to beat analyst’s earnings estimates which ends up in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their balance sheet for things such as failed mergers or acquisitions, restructuring, unprofitable divisions, failed developing the site, etc. Many times these write-offs are certainly not reflected being a continue earnings growth but rather show up being a footnote on the financial report. These “one time” write-offs occur with an increase of frequency than you may expect. Many companies that form the Dow Jones Industrial Average have such write-offs.
Return on Equity
One other popular indicator, which i’ve found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a high return on equity with successful corporate management which is maximizing shareholder value (the greater the ROE better).
Recognise the business is much more successful?
Coca-Cola (KO) which has a Return on Equity of 46% or
Merrill Lynch (MER) which has a Return on Equity of 18%
The answer then is Merrill Lynch by measure. But Coca-Cola carries a better ROE. How is that this possible?
Return on equity is calculated by dividing a company’s net income by stockholder’s equity. Coca-Cola is so over valued that its stockholder’s equity is simply add up to about 5% of the total market value of the company. The stockholder equity is so small that nearly any amount of net income will produce a favorable ROE.
Merrill Lynch however, has stockholder’s equity add up to 42% of the market value of the company and requirements a much higher net income figure to create a comparable ROE. My point is the fact that ROE doesn’t compare apples to apples then isn’t a good relative indicator in comparing company performance.
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