This is focused on individuals who would like to invest in individual stocks. I has shared along with you the ways I have tried personally over the years to choose stocks which i have found to get consistently profitable in actual trading. I want to use a mixture of fundamental and technical analysis for picking stocks. My experience shows that successful stock selection involves two steps:
1. Select a regular with all the fundamental analysis presented then
2. Confirm that this stock is definitely an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being over the 100-Day EMA
This two-step process enhances the odds that this stock you end up picking will likely be profitable. It also provides a signal to offer stock which includes not performed as expected 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, a different type of strategy.
Fundamental Analysis
Fundamental analysis is the study of monetary data such as earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to assist select securities for future price appreciation. Over recent years I have tried personally many strategies to measuring a company’s growth rate in an attempt to predict its stock’s future price performance. I manipulate methods such as earnings growth and return on equity. I have found why these methods are certainly not always reliable or predictive.
Earning Growth
By way of example, corporate net earnings are at the mercy of vague bookkeeping practices such as depreciation, earnings, inventory adjustment and reserves. These are typical at the mercy of interpretation by accountants. Today as part of your, corporations 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 their balance sheet for things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed product development, etc. Many times these write-offs are certainly not reflected like a continue earnings growth but make an appearance like a footnote over a financial report. These “one time” write-offs occur with more frequency than you may expect. Many firms that form the Dow Jones Industrial Average have got such write-offs.
Return on Equity
One other popular indicator, which i’ve found 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’s maximizing shareholder value (the larger 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 is Merrill Lynch by any measure. But Coca-Cola includes a much higher ROE. How is this possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola can be so over valued what has stockholder’s equity is simply corresponding to about 5% from the total market value from the company. The stockholder equity can be so small that almost anywhere of net gain will develop a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity corresponding to 42% from the market value from the company and needs a much higher net gain figure to make a comparable ROE. My point is ROE doesn’t compare apples to apples so therefore isn’t a good relative indicator in comparing company performance.
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