This is dedicated to individuals who want to purchase individual stocks. I would like to share along with you the strategy I have used in the past to select stocks that I have discovered to be consistently profitable in actual trading. I want to make use of a mixture of fundamental and technical analysis for picking stocks. My experience has shown that successful stock selection involves two steps:
1. Select a regular while using the fundamental analysis presented then
2. Confirm that this stock is surely 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 that this stock you select will probably be profitable. It even offers a sign to trade ETFs containing 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 will be the study of economic data such as earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over recent years I have used many strategies to measuring a company’s rate of growth so as to predict its stock’s future price performance. I used methods such as earnings growth and return on equity. I have discovered that these methods aren’t always reliable or predictive.
Earning Growth
By way of example, corporate net income is susceptible to vague bookkeeping practices such as depreciation, income, inventory adjustment and reserves. These are susceptible to interpretation by accountants. Today more than ever before, corporations are under increasing pressure to beat 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 such things as failed mergers or acquisitions, restructuring, unprofitable divisions, failed product development, etc. Many times these write-offs aren’t reflected as a drag on earnings growth but rather appear as a footnote on a financial report. These “one time” write-offs occur with more frequency than you could possibly expect. Many companies which make up the Dow Jones Industrial Average have got such write-offs.
Return on Equity
One other popular indicator, which has been found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a higher return on equity with successful corporate management that is certainly maximizing shareholder value (the greater the ROE the better).
Which company 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 carries a much higher ROE. How is that this possible?
Return on equity is calculated by dividing a company’s post tax profit by stockholder’s equity. Coca-Cola is indeed 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 is indeed small that just about any amount of post tax profit will produce a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity equal to 42% from the market price from the company and requirements a much higher post tax profit figure to generate a comparable ROE. My point is always that ROE will not compare apples to apples therefore is not a good relative indicator in comparing company performance.
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