This is focused on individuals who want to invest in individual stocks. I want to share together with you the strategy I have used over time to select stocks that we have realized to be consistently profitable in actual trading. I love to work with a blend of fundamental and technical analysis for choosing stocks. My experience has shown that successful stock selection involves two steps:
1. Select a regular using the fundamental analysis presented then
2. Confirm how the stock is surely an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being across the 100-Day EMA
This two-step process boosts the odds how the stock you choose will be profitable. It also provides a sign to market ETFs containing not performed needlessly to say if it’s 50-Day EMA drops below its 100-Day EMA. It can be another useful means for selecting stocks for covered call writing, yet another kind of strategy.
Fundamental Analysis
Fundamental analysis could be the study of economic data including earnings, dividends and your money flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over time I have used many options for measuring a company’s growth rate so as to predict its stock’s future price performance. I used methods including earnings growth and return on equity. I have realized these methods are not always reliable or predictive.
Earning Growth
For example, corporate net profits are subject to vague bookkeeping practices including depreciation, income, inventory adjustment and reserves. These are common subject to interpretation by accountants. Today inside your, corporations are under increasing pressure to overpower analyst’s earnings estimates which results in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their own balance sheet for such things as failed mergers or acquisitions, restructuring, unprofitable divisions, failed product, etc. Many times these write-offs are not reflected like a continue earnings growth but appear like a footnote with a financial report. These “one time” write-offs occur with more frequency than you might expect. Many companies which constitute the Dow Jones Industrial Average have got such write-offs.
Return on Equity
One other popular indicator, which i’ve found just isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a high return on equity with successful corporate management which is maximizing shareholder value (the higher the ROE better).
Which company is a lot more successful?
Coca-Cola (KO) with a Return on Equity of 46% or
Merrill Lynch (MER) with a Return on Equity of 18%
The answer then is Merrill Lynch by measure. But Coca-Cola features a better ROE. How is that 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 what has stockholder’s equity is merely equal to about 5% of the total market price of the company. The stockholder equity can be so small that nearly any amount of post tax profit will make a favorable ROE.
Merrill Lynch on the other hand, has stockholder’s equity equal to 42% of the market price of the company and requires a much higher post tax profit figure to make a comparable ROE. My point is the fact that ROE does not compare apples to apples therefore is not a good relative indicator in comparing company performance.
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