That is dedicated to individuals who want to spend money on individual stocks. I has shared with you the techniques I have tried personally through the years to select stocks that I have found to be consistently profitable in actual trading. I prefer to use a blend of fundamental and technical analysis for selecting stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a share while using fundamental analysis presented then
2. Confirm that this stock can be an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process enhances the odds that this stock you select will likely be profitable. It also provides a signal to trade Automatic Income Method which has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It can be another useful means for selecting stocks for covered call writing, yet another kind of strategy.
Fundamental Analysis
Fundamental analysis is the study of financial data such as earnings, dividends and money flow, which influence the pricing of securities. I use fundamental analysis to aid select securities for future price appreciation. Over many years I have tried personally many strategies to measuring a company’s growth rate so as to predict its stock’s future price performance. I manipulate methods such as earnings growth and return on equity. I have found that these methods are not always reliable or predictive.
Earning Growth
For example, corporate net income is subject to vague bookkeeping practices such as depreciation, cashflow, inventory adjustment and reserves. These are subject to interpretation by accountants. Today more than ever before, corporations they are under increasing pressure to conquer analyst’s earnings estimates which results in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on his or her balance sheet for such things as failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs are not reflected like a drag on earnings growth but rather show up like a footnote on the financial report. These “one time” write-offs occur with additional frequency than you may expect. Many companies that make up the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other indicator, which I have found just isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a top return on equity with successful corporate management that is maximizing shareholder value (the higher the ROE better).
Recognise the business is much more successful?
Coca-Cola (KO) with a Return on Equity of 46% or
Merrill Lynch (MER) with a Return on Equity of 18%
The answer then is Merrill Lynch by any measure. But Coca-Cola carries a much higher ROE. How are these claims possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola is so over valued what has stockholder’s equity is simply comparable to about 5% of the total market value of the company. The stockholder equity is so small that almost anywhere of net gain will create a favorable ROE.
Merrill Lynch however, has stockholder’s equity comparable to 42% of the market value of the company and requires a greater net gain figure to create a comparable ROE. My point is ROE doesn’t compare apples to apples then is not a good relative indicator in comparing company performance.
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