This can be committed to those who wish to put money into individual stocks. I want to share along the ways I have used over the years to pick stocks which i have found being consistently profitable in actual trading. I prefer to make use of a blend of fundamental and technical analysis for choosing stocks. My experience has shown that successful stock selection involves two steps:
1. Select a stock while using fundamental analysis presented then
2. Confirm the stock is an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process boosts the odds the stock you choose will likely be profitable. It offers a sign to sell stock which includes not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is a useful way for selecting stocks for covered call writing, a different sort of strategy.
Fundamental Analysis
Fundamental analysis is the study of economic data including earnings, dividends and cash flow, which influence the pricing of securities. I use fundamental analysis to help you select securities for future price appreciation. Over time I have used many methods for measuring a company’s growth rate so that they can predict its stock’s future price performance. I purchased methods including earnings growth and return on equity. I have found the methods are not always reliable or predictive.
Earning Growth
By way of example, corporate net income is at the mercy of vague bookkeeping practices including depreciation, cashflow, inventory adjustment and reserves. These are all at the mercy of interpretation by accountants. Today more than ever before, corporations they are under increasing pressure to get over 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 product development, etc. Many times these write-offs are not reflected being a drag on earnings growth but instead make an appearance being a footnote over a financial report. These “one time” write-offs occur with more frequency than you may expect. Many companies which from the Dow Jones Industrial Average have such write-offs.
Return on Equity
Another popular indicator, which I have found just isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a higher return on equity with successful corporate management that’s maximizing shareholder value (the better the ROE the greater).
Recognise the business is 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 solution is Merrill Lynch by any measure. But Coca-Cola carries a higher ROE. How are these claims possible?
Return on equity is calculated by dividing a company’s post tax profit by stockholder’s equity. Coca-Cola is really over valued what has stockholder’s equity is simply corresponding to about 5% with the total monatary amount with the company. The stockholder equity is really small that almost anywhere of post tax profit will create a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity corresponding to 42% with the monatary amount with the company and needs a much higher post tax profit figure to create a comparable ROE. My point is the fact that ROE does not compare apples to apples so therefore is very little good relative indicator in comparing company performance.
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