This can be committed to those of you who wish to put money into individual stocks. I would like to share with you the strategy I have used through the years to select stocks that we have realized to get consistently profitable in actual trading. I prefer to utilize a mixture of fundamental and technical analysis for picking stocks. My experience has shown that successful stock selection involves two steps:
1. Select a stock using the fundamental analysis presented then
2. Confirm that this stock is definitely an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process boosts the odds that this stock you select is going to be profitable. It even offers a signal to market Automatic Income Method that has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is a useful way of selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis may be the study of financial data for example earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over recent years I have used many methods for measuring a company’s growth rate so as to predict its stock’s future price performance. I purchased methods for example earnings growth and return on equity. I have realized why these methods usually are not always reliable or predictive.
Earning Growth
For instance, corporate net earnings are susceptible to vague bookkeeping practices for example depreciation, cashflow, inventory adjustment and reserves. These are susceptible to interpretation by accountants. Today inside your, corporations they are under increasing pressure to overpower analyst’s earnings estimates which ends up 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 product, etc. Many times these write-offs usually are not reflected like a drag on earnings growth but alternatively show up like a footnote on a financial report. These “one time” write-offs occur with additional frequency than you may expect. Many companies which constitute the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other indicator, which I have found is just not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates an increased return on equity with successful corporate management that is certainly maximizing shareholder value (the larger the ROE the greater).
Recognise the business is a lot more successful?
Coca-Cola (KO) using a Return on Equity of 46% or
Merrill Lynch (MER) using a Return on Equity of 18%
The answer then is Merrill Lynch by any measure. But Coca-Cola carries a much higher ROE. How is possible?
Return on equity is calculated by dividing a company’s net income by stockholder’s equity. Coca-Cola is indeed over valued that its stockholder’s equity is simply add up to about 5% from the total rate from the company. The stockholder equity is indeed small that just about anywhere of net income will produce a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity add up to 42% from the rate from the company and requires a much higher net income figure to make a comparable ROE. My point is ROE does not compare apples to apples then is very little good relative indicator in comparing company performance.
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