This can be focused on individuals who want to spend money on individual stocks. I wants to share along the methods I have tried personally over time to pick stocks that we have found being consistently profitable in actual trading. I love to use a mix of fundamental and technical analysis for choosing stocks. My experience shows that successful stock selection involves two steps:
1. Select a stock using the fundamental analysis presented then
2. Confirm the stock is an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being across the 100-Day EMA
This two-step process enhances the odds the stock you decide on will be profitable. It offers a transmission to trade Automatic Income Method containing not performed not surprisingly if it’s 50-Day EMA drops below its 100-Day EMA. It is another useful method for selecting stocks for covered call writing, quantity strategy.
Fundamental Analysis
Fundamental analysis could be the study of economic data like earnings, dividends and money flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over recent years I have tried personally many strategies to measuring a company’s growth rate in an attempt to predict its stock’s future price performance. I purchased methods like earnings growth and return on equity. I have found these methods are not always reliable or predictive.
Earning Growth
By way of example, corporate net profits are susceptible to vague bookkeeping practices like depreciation, cashflow, inventory adjustment and reserves. These are susceptible to interpretation by accountants. Today more than ever, corporations are under increasing pressure to beat analyst’s earnings estimates which leads to more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their own balance sheet for things such as failed mergers or acquisitions, restructuring, unprofitable divisions, failed product development, etc. Many times these write-offs are not reflected as a continue earnings growth but rather arrive as a footnote on the financial report. These “one time” write-offs occur with additional frequency than you may expect. Many companies which from the Dow Jones Industrial Average have got such write-offs.
Return on Equity
One other popular indicator, which i’ve found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a top return on equity with successful corporate management that’s maximizing shareholder value (the larger the ROE the better).
Which company is a lot 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 answer then is Merrill Lynch by any measure. But Coca-Cola has a greater ROE. How is possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola is really over valued that it is stockholder’s equity is only equal to about 5% in the total market price in the company. The stockholder equity is really small that almost anywhere of net gain will create a favorable ROE.
Merrill Lynch however, has stockholder’s equity equal to 42% in the market price in the company and requires a much higher net gain figure to create a comparable ROE. My point is always that ROE does not compare apples to apples therefore is not an good relative indicator in comparing company performance.
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