That is dedicated to those who wish to spend money on individual stocks. I wants to share along with you the strategy I have tried personally over the years to select stocks which i have discovered being consistently profitable in actual trading. I want to make use of a mixture of fundamental and technical analysis for selecting stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a standard using the fundamental analysis presented then
2. Confirm that this stock is definitely an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process increases the odds that this stock you end up picking will be profitable. It even offers a sign to sell options that has not performed not surprisingly if it’s 50-Day EMA drops below its 100-Day EMA. It is another useful way of selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis will be the study of monetary data like earnings, dividends and money flow, which influence the pricing of securities. I use fundamental analysis to assist select securities for future price appreciation. Over many years I have tried personally many options for measuring a company’s rate of growth so that they can predict its stock’s future price performance. I manipulate methods like earnings growth and return on equity. I have discovered the methods are not always reliable or predictive.
Earning Growth
For example, corporate net profits are susceptible to vague bookkeeping practices like depreciation, cashflow, inventory adjustment and reserves. These are typical susceptible to interpretation by accountants. Today more than ever, corporations are under increasing pressure to get over analyst’s earnings estimates which results 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, etc. Many times these write-offs are not reflected like a continue earnings growth but instead make an appearance like a footnote on a 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 have taken such write-offs.
Return on Equity
Another popular indicator, which i’ve found is just 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 better the ROE better).
Recognise the business 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 reply is Merrill Lynch by measure. But Coca-Cola includes a better ROE. How is 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 its stockholder’s equity is only add up to about 5% with the total market price with the company. The stockholder equity is indeed small that just about any amount of post tax profit will produce a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity add up to 42% with the market price with the company and requires a greater post tax profit figure to generate a comparable ROE. My point is ROE will not compare apples to apples then is not a good relative indicator in comparing company performance.
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