This really is focused on those of you who want to put money into individual stocks. I has shared along the ways I have used through the years to pick out stocks that we have found being consistently profitable in actual trading. I prefer to use a combination of fundamental and technical analysis for choosing stocks. My experience has demonstrated that successful stock selection involves two steps:
1. Select a stock while 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 increases the odds how the stock you select will probably be profitable. It also provides an indication to market Automatic Income Method that has not performed as expected if it’s 50-Day EMA drops below its 100-Day EMA. It can be another useful way of selecting stocks for covered call writing, yet another kind of strategy.
Fundamental Analysis
Fundamental analysis is the study of financial 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 time I have used many options for measuring a company’s growth rate so as to predict its stock’s future price performance. I purchased methods like earnings growth and return on equity. I have found the methods aren’t always reliable or predictive.
Earning Growth
For example, corporate net income is at the mercy of vague bookkeeping practices like depreciation, cashflow, inventory adjustment and reserves. These are typical at the mercy of interpretation by accountants. Today as part of your, corporations they are under increasing pressure to overpower analyst’s earnings estimates which leads to more aggressive accounting interpretations. Some corporations take special “one time” write-offs on the balance sheet for things such as failed mergers or acquisitions, restructuring, unprofitable divisions, failed product, etc. Many times these write-offs aren’t reflected as a continue earnings growth but rather make an appearance as a footnote on a financial report. These “one time” write-offs occur with increased frequency than you may expect. Many companies that form the Dow Jones Industrial Average have such write-offs.
Return on Equity
One other indicator, which I have found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a high return on equity with successful corporate management that’s maximizing shareholder value (the larger the ROE the higher).
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 measure. But Coca-Cola includes a greater ROE. How is possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola is indeed over valued that it is stockholder’s equity is just comparable to about 5% from the total market price from the company. The stockholder equity is indeed small that nearly anywhere of net gain will make a favorable ROE.
Merrill Lynch however, has stockholder’s equity comparable to 42% from the market price from the company as well as a greater net gain figure to create a comparable ROE. My point is that ROE does not compare apples to apples then is not an good relative indicator in comparing company performance.
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