That is focused on people who want to invest in individual stocks. I want to share with you the techniques I have used through the years to pick out stocks that we have found being consistently profitable in actual trading. I prefer to make use of a combination of fundamental and technical analysis for picking stocks. My experience indicates that successful stock selection involves two steps:
1. Select a share while using the fundamental analysis presented then
2. Confirm how the stock can be an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being over the 100-Day EMA
This two-step process boosts the odds how the stock you select will be profitable. It now offers a transmission to offer options containing not performed as expected if it’s 50-Day EMA drops below its 100-Day EMA. It is a useful method for selecting stocks for covered call writing, a different sort of strategy.
Fundamental Analysis
Fundamental analysis may be the study of financial data like earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to help you select securities for future price appreciation. Over the years I have used many strategies to measuring a company’s growth rate so as to predict its stock’s future price performance. I have used methods like earnings growth and return on equity. I have found why these methods usually are not always reliable or predictive.
Earning Growth
As an example, corporate net income is susceptible to vague bookkeeping practices like depreciation, cashflow, inventory adjustment and reserves. These are all susceptible to interpretation by accountants. Today as part of your, corporations are under increasing pressure to beat analyst’s earnings estimates which ends up in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their own balance sheet for specific things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed product development, etc. Many times these write-offs usually are not reflected being a drag on earnings growth but rather appear being a footnote on the financial report. These “one time” write-offs occur with an increase of frequency than you might expect. Many companies which make up the Dow Jones Industrial Average have taken 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 top return on equity with successful corporate management that is certainly maximizing shareholder value (the better the ROE the 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 has a better ROE. How are these claims 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 it is stockholder’s equity is only equal to about 5% with the total market value with the company. The stockholder equity is indeed small that almost anywhere of post tax profit will make a favorable ROE.
Merrill Lynch however, has stockholder’s equity equal to 42% with the market value with the company as well as a greater post tax profit figure to create a comparable ROE. My point is ROE won’t compare apples to apples then is not an good relative indicator in comparing company performance.
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