This can be committed to those of you who would like to invest in individual stocks. I would like to share along the strategy Personally i have tried through the years to choose stocks that we are finding to be consistently profitable in actual trading. I prefer to use a mixture of fundamental and technical analysis for selecting stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a stock while using fundamental analysis presented then
2. Confirm that the stock can be an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being over the 100-Day EMA
This two-step process increases the odds that the stock you choose will be profitable. It offers an indication to market Automatic Income Method which has not performed not surprisingly if it’s 50-Day EMA drops below its 100-Day EMA. It is a useful way for selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis will be the study of monetary 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 the years Personally i have tried many options for measuring a company’s growth rate to try to predict its stock’s future price performance. I manipulate methods like earnings growth and return on equity. I are finding that these methods usually are not always reliable or predictive.
Earning Growth
As an example, corporate net earnings are subject to vague bookkeeping practices like depreciation, cash flow, inventory adjustment and reserves. These are subject to interpretation by accountants. Today more than ever before, 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 like failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs usually are not reflected being a continue earnings growth but rather appear being a footnote over a financial report. These “one time” write-offs occur with an increase of frequency than you might expect. Many firms that form the Dow Jones Industrial Average have taken such write-offs.
Return on Equity
Another 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’s maximizing shareholder value (the better the ROE 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 measure. But Coca-Cola carries a better ROE. How is that this possible?
Return on equity is calculated by dividing a company’s net profit by stockholder’s equity. Coca-Cola is so over valued the reason is stockholder’s equity is just comparable to about 5% from the total market price from the company. The stockholder equity is so small that almost any amount of net profit will develop a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity comparable to 42% from the market price from the company and requirements a much higher net profit figure to make a comparable ROE. My point is that ROE won’t compare apples to apples then is very little good relative indicator in comparing company performance.
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