That is focused on individuals who would like to invest in individual stocks. I would like to share along with you the methods I have tried personally in the past to choose stocks which i have discovered to get consistently profitable in actual trading. I want to use a blend of fundamental and technical analysis for choosing stocks. My experience shows that successful stock selection involves two steps:
1. Select a share with all the fundamental analysis presented then
2. Confirm that the stock can be an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being higher than the 100-Day EMA
This two-step process boosts the odds that the stock you decide on will likely be profitable. It even offers a sign to market ETFs that has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is also a useful means for selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis is the study of financial data for example earnings, dividends and funds 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 methods for measuring a company’s rate of growth in an attempt to predict its stock’s future price performance. I purchased methods for example earnings growth and return on equity. I have discovered that these methods usually are not always reliable or predictive.
Earning Growth
For instance, corporate net profits are subject to vague bookkeeping practices for example depreciation, income, inventory adjustment and reserves. These are all subject to interpretation by accountants. Today more than ever, corporations they are under increasing pressure to get over analyst’s earnings estimates which leads to more aggressive accounting interpretations. Some corporations take special “one time” write-offs on the balance sheet for specific things like 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 instead show up like a footnote on the financial report. These “one time” write-offs occur with an increase of frequency than you could expect. Many companies which make up the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other popular indicator, which has been 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 is certainly maximizing shareholder value (the higher the ROE better).
Which company is more successful?
Coca-Cola (KO) using a Return on Equity of 46% or
Merrill Lynch (MER) using a Return on Equity of 18%
The solution is Merrill Lynch by any measure. But Coca-Cola has a much higher ROE. How is this possible?
Return on equity is calculated by dividing a company’s post tax profit by stockholder’s equity. Coca-Cola can be so over valued the reason is stockholder’s equity is just equal to about 5% in the total market price in the company. The stockholder equity can be so small that almost any amount of post tax profit will develop a favorable ROE.
Merrill Lynch on the other hand, has stockholder’s equity equal to 42% in the market price in the company and requirements a greater post tax profit figure to make a comparable ROE. My point is the fact that ROE does not compare apples to apples so therefore is not an good relative indicator in comparing company performance.
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