That is focused on those of you which invest in individual stocks. I want to share together with you the methods I have used over time to select stocks i have discovered to be consistently profitable in actual trading. I like to utilize a mix of fundamental and technical analysis for picking stocks. My experience has shown that successful stock selection involves two steps:
1. Select a standard 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 enhances the odds how the stock you select is going to be profitable. It now offers a sign to market stock which has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is another useful means for selecting stocks for covered call writing, a different sort of strategy.
Fundamental Analysis
Fundamental analysis will be the study of monetary data like earnings, dividends and cash flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over many years I have used many means of measuring a company’s rate of growth to try to predict its stock’s future price performance. I purchased methods like earnings growth and return on equity. I have discovered that these methods usually are not always reliable or predictive.
Earning Growth
By way of example, corporate net earnings are subject to vague bookkeeping practices like depreciation, earnings, inventory adjustment and reserves. These are common subject to interpretation by accountants. Today inside your, corporations are under increasing pressure to conquer analyst’s earnings estimates which ends up in 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 developing the site, etc. Many times these write-offs usually are not reflected being a drag on earnings growth but alternatively appear being a footnote on a financial report. These “one time” write-offs occur with an increase of frequency than you may expect. Many firms that form the Dow Jones Industrial Average have taken such write-offs.
Return on Equity
One other popular indicator, which i’ve found is just 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 greater).
Recognise the business 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 answer is Merrill Lynch by measure. But Coca-Cola carries a greater ROE. How is this possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola is indeed over valued the reason is stockholder’s equity is just add up to about 5% with the total market value with the company. The stockholder equity is indeed small that just about any amount of net gain will make a favorable ROE.
Merrill Lynch on the other hand, has stockholder’s equity add up to 42% with the market value with the company as well as a greater net gain figure to generate a comparable ROE. My point is ROE doesn’t compare apples to apples then is not a good relative indicator in comparing company performance.
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