This really is committed to those of you who would like to purchase individual stocks. I would like to share along with you the strategy I have used through the years to select stocks that we have realized being consistently profitable in actual trading. I want to work with a mixture of fundamental and technical analysis for choosing stocks. My experience has shown that successful stock selection involves two steps:
1. Select a stock while using fundamental analysis presented then
2. Confirm the stock can be an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being higher than the 100-Day EMA
This two-step process raises the odds the stock you end up picking will be profitable. It now offers a signal to sell stock that has not performed not surprisingly if it’s 50-Day EMA drops below its 100-Day EMA. It is a useful means for selecting stocks for covered call writing, yet another kind of strategy.
Fundamental Analysis
Fundamental analysis could be the study of financial data like earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to help you select securities for future price appreciation. Over recent years I have used many strategies to measuring a company’s rate of growth to try to predict its stock’s future price performance. I have used methods like earnings growth and return on equity. I have realized that these methods aren’t always reliable or predictive.
Earning Growth
For example, corporate net income is subject to vague bookkeeping practices like depreciation, income, inventory adjustment and reserves. These are common subject to interpretation by accountants. Today more than ever, corporations are under increasing pressure to overpower analyst’s earnings estimates which results in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their own balance sheet for things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs aren’t reflected being a drag on earnings growth but appear being a footnote over a financial report. These “one time” write-offs occur with increased frequency than you might expect. Many firms that from the Dow Jones Industrial Average have got such write-offs.
Return on Equity
One other popular indicator, which I have found isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates an increased return on equity with successful corporate management which is maximizing shareholder value (the better the ROE better).
Recognise the business is a lot 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 solution is Merrill Lynch by any measure. But Coca-Cola carries a much higher ROE. How is possible?
Return on equity is calculated by dividing a company’s post tax profit by stockholder’s equity. Coca-Cola is really over valued that it is stockholder’s equity is only equal to about 5% from the total market price from the company. The stockholder equity is really small that nearly any amount of post tax profit will make a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity equal to 42% from the market price from the company and needs a much higher post tax profit figure to make a comparable ROE. My point is always that ROE won’t compare apples to apples then is very little good relative indicator in comparing company performance.
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