This can be dedicated to those who would like to purchase individual stocks. I would like to share with you the techniques I have used over the years to select stocks which i are finding being consistently profitable in actual trading. I love to utilize a combination of fundamental and technical analysis for picking stocks. My experience has shown that successful stock selection involves two steps:
1. Select a regular with all the fundamental analysis presented then
2. Confirm how the stock is an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being higher than the 100-Day EMA
This two-step process enhances the odds how the stock you decide on will be profitable. It also provides a sign to trade Automatic Income Method that has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is also a useful way for selecting stocks for covered call writing, quantity strategy.
Fundamental Analysis
Fundamental analysis may be the study of financial data like earnings, dividends and money flow, which influence the pricing of securities. I use fundamental analysis to assist select securities for future price appreciation. Over the years I have used many methods for measuring a company’s rate of growth to try to predict its stock’s future price performance. I purchased methods like earnings growth and return on equity. I are finding the methods are certainly not always reliable or predictive.
Earning Growth
By way of example, corporate net earnings are be subject to vague bookkeeping practices like depreciation, income, inventory adjustment and reserves. These are all be subject to interpretation by accountants. Today more than ever before, corporations they are under increasing pressure to get over analyst’s earnings estimates which results in 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 as being a continue earnings growth but rather make an appearance as being a footnote with a financial report. These “one time” write-offs occur with increased frequency than you might expect. Many firms that form the Dow Jones Industrial Average have 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 that is maximizing shareholder value (the higher the ROE the better).
Which company is more successful?
Coca-Cola (KO) using a Return on Equity of 46% or
Merrill Lynch (MER) using a Return on Equity of 18%
The answer is Merrill Lynch by any measure. But Coca-Cola features a higher ROE. How is possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola can be so over valued that it is stockholder’s equity is merely equal to about 5% from the total market price from the company. The stockholder equity can be so small that almost anywhere of net gain will develop a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity equal to 42% from the market price from the company and requirements a much higher net gain figure to create a comparable ROE. My point is the fact that ROE will not compare apples to apples therefore isn’t a good relative indicator in comparing company performance.
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