This really is committed to those of you which invest in individual stocks. I wants to share with you the strategy I have tried personally in the past to pick out stocks that we are finding being consistently profitable in actual trading. I prefer to make use of a mixture of fundamental and technical analysis for picking stocks. My experience indicates that successful stock selection involves two steps:
1. Select a share while using the fundamental analysis presented then
2. Confirm the stock is definitely 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 the stock you choose will likely be profitable. It offers a sign to trade ETFs which includes not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is another useful means for selecting stocks for covered call writing, a different sort of strategy.
Fundamental Analysis
Fundamental analysis may be the study of economic data such as earnings, dividends and your money flow, which influence the pricing of securities. I use fundamental analysis to help you select securities for future price appreciation. Over many years I have tried personally many methods for measuring a company’s growth rate so as to predict its stock’s future price performance. I have used methods such as earnings growth and return on equity. I are finding these methods are not always reliable or predictive.
Earning Growth
By way of example, corporate net income is at the mercy of vague bookkeeping practices such as depreciation, income, inventory adjustment and reserves. These are at the mercy of interpretation by accountants. Today more than ever, corporations they are under increasing pressure to conquer 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 are not reflected as a drag on earnings growth but instead show up as a footnote over a financial report. These “one time” write-offs occur with an increase of frequency than you may expect. Many companies which from 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 an increased return on equity with successful corporate management which is maximizing shareholder value (the greater the ROE the greater).
Which company is a lot more successful?
Coca-Cola (KO) having a Return on Equity of 46% or
Merrill Lynch (MER) having a Return on Equity of 18%
The reply is Merrill Lynch by any measure. But Coca-Cola carries a much higher ROE. How is this possible?
Return on equity is calculated by dividing a company’s net profit by stockholder’s equity. Coca-Cola is so over valued what has stockholder’s equity is merely add up to about 5% with the total market price with the company. The stockholder equity is so small that nearly anywhere of net profit will develop a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity add up to 42% with the market price with the company and requirements a much higher net profit figure to create a comparable ROE. My point is ROE won’t compare apples to apples therefore is very little good relative indicator in comparing company performance.
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