That is dedicated to those who want to spend money on individual stocks. I would like to share along the methods I have used over the years to select stocks i have discovered to get consistently profitable in actual trading. I prefer to make use of a combination of fundamental and technical analysis for choosing stocks. My experience has shown that successful stock selection involves two steps:
1. Select a share while using 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 select is going to be profitable. It even offers an indication to offer Chuck Hughes that has not performed as you 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 will be the study of monetary data such as earnings, dividends and your money flow, which influence the pricing of securities. I use fundamental analysis to aid select securities for future price appreciation. Over time I have used many strategies to measuring a company’s rate of growth to try to predict its stock’s future price performance. I have used methods such as earnings growth and return on equity. I have discovered the methods are not always reliable or predictive.
Earning Growth
For instance, corporate net income is at the mercy of vague bookkeeping practices such as depreciation, cashflow, inventory adjustment and reserves. These are at the mercy of interpretation by accountants. Today more than ever, corporations are under increasing pressure to beat analyst’s earnings estimates which leads to 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 developing the site, etc. Many times these write-offs are not reflected like a continue earnings growth but alternatively make an appearance like a footnote over a financial report. These “one time” write-offs occur with an increase of frequency than you may expect. Many firms that constitute the Dow Jones Industrial Average have such write-offs.
Return on Equity
One other popular indicator, which I have found is just 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 maximizing shareholder value (the better the ROE the better).
Which company is 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 reply is Merrill Lynch by measure. But Coca-Cola carries 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 the reason is stockholder’s equity is just equal to about 5% of the total market price of the company. The stockholder equity is indeed small that nearly any amount of post tax profit will create a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity equal to 42% of the market price of the company as well as a greater post tax profit figure to make a comparable ROE. My point is ROE will not compare apples to apples therefore is not a good relative indicator in comparing company performance.
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