This can be committed to those who would like to invest in individual stocks. I wants to share together with you the methods I have used through the years to choose stocks i have realized to become consistently profitable in actual trading. I love to work with a blend of fundamental and technical analysis for selecting stocks. My experience indicates that successful stock selection involves two steps:
1. Select a stock with all the fundamental analysis presented then
2. Confirm how the stock is surely an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being across the 100-Day EMA
This two-step process increases the odds how the stock you end up picking will probably be profitable. It now offers a transmission to offer Automatic Income Method that has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is a useful method for selecting stocks for covered call writing, quantity strategy.
Fundamental Analysis
Fundamental analysis may be the study of economic data for example earnings, dividends and money flow, which influence the pricing of securities. I use fundamental analysis to aid select securities for future price appreciation. Over recent years I have used many methods for measuring a company’s growth rate so that they can predict its stock’s future price performance. I have used methods for example earnings growth and return on equity. I have realized that these methods usually are not always reliable or predictive.
Earning Growth
As an example, corporate net income is susceptible to vague bookkeeping practices for example depreciation, income, inventory adjustment and reserves. These are all susceptible 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 balance sheet for things such as failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs usually are not reflected like a continue earnings growth but arrive like a footnote with a financial report. These “one time” write-offs occur with increased frequency than you could possibly expect. Many companies that form the Dow Jones Industrial Average took such write-offs.
Return on Equity
Another popular indicator, which i’ve found just isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a high return on equity with successful corporate management that is certainly maximizing shareholder value (the better the ROE the higher).
Recognise the business is a bit 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 reply is Merrill Lynch by any measure. But Coca-Cola includes a better ROE. How is 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 only comparable to about 5% from the total market value from the company. The stockholder equity is so small that almost anywhere of net profit will produce a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity comparable to 42% from the market value from the company as well as a much higher net profit figure to make a comparable ROE. My point is that ROE doesn’t compare apples to apples then is very little good relative indicator in comparing company performance.
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