This is specialized in people which purchase individual stocks. I has shared with you the methods I have used over the years to pick out stocks which i have found being consistently profitable in actual trading. I want 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 regular while using fundamental analysis presented then
2. Confirm that the stock can be an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process enhances the odds that the stock you choose will probably be profitable. It also provides a sign to sell Automatic Income Method which has not performed as expected if it’s 50-Day EMA drops below its 100-Day EMA. It is another useful way of selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis could be the study of financial data such as earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to aid select securities for future price appreciation. Over recent years I have used many strategies to measuring a company’s growth rate to try to predict its stock’s future price performance. I manipulate methods such as earnings growth and return on equity. I have found the methods usually are not always reliable or predictive.
Earning Growth
As an example, corporate net income is at the mercy of vague bookkeeping practices such as depreciation, cash flow, inventory adjustment and reserves. These are common at the mercy of interpretation by accountants. Today inside your, corporations are under increasing pressure to get over analyst’s earnings estimates which leads to 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 website, etc. Many times these write-offs usually are not reflected as being a drag on earnings growth but alternatively appear as being a footnote on the financial report. These “one time” write-offs occur with increased frequency than you may expect. Many companies that form the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other indicator, which has been 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 better the ROE the better).
Which company is a bit more successful?
Coca-Cola (KO) which has a Return on Equity of 46% or
Merrill Lynch (MER) which has a Return on Equity of 18%
The answer then is Merrill Lynch by any measure. But Coca-Cola has a much higher 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 is really over valued that it is stockholder’s equity is simply add up to about 5% of the total rate of the company. The stockholder equity is really small that nearly anywhere of post tax profit will create a favorable ROE.
Merrill Lynch on the other hand, has stockholder’s equity add up to 42% of the rate of the company and needs a greater post tax profit figure to generate a comparable ROE. My point is always that ROE doesn’t compare apples to apples then is not a good relative indicator in comparing company performance.
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