This can be focused on those of you who would like to put money into individual stocks. I want to share together with you the strategy I have tried personally over the years to pick stocks that I have found being consistently profitable in actual trading. I prefer to utilize a mixture of fundamental and technical analysis for selecting stocks. My experience has shown that successful stock selection involves two steps:
1. Select a stock with all the fundamental analysis presented then
2. Confirm the stock can be an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being across the 100-Day EMA
This two-step process boosts the odds the stock you choose will likely be profitable. It offers a sign to market options containing not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is another useful method for selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis could be the study of monetary data including earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over many years I have tried personally many options for measuring a company’s growth rate in an attempt to predict its stock’s future price performance. I purchased methods including earnings growth and return on equity. I have found that these methods aren’t always reliable or predictive.
Earning Growth
As an example, corporate net income is at the mercy of vague bookkeeping practices including depreciation, earnings, inventory adjustment and reserves. These are all at the mercy of interpretation by accountants. Today inside your, corporations are under increasing pressure to overpower 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 such things as failed mergers or acquisitions, restructuring, unprofitable divisions, failed developing the site, etc. Many times these write-offs aren’t reflected as a continue earnings growth but arrive as a footnote with a financial report. These “one time” write-offs occur with additional frequency than you could expect. Many companies that make up the Dow Jones Industrial Average have such write-offs.
Return on Equity
Another 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 the better).
Which company is more successful?
Coca-Cola (KO) with a Return on Equity of 46% or
Merrill Lynch (MER) with a Return on Equity of 18%
The solution is Merrill Lynch by any measure. But Coca-Cola carries a greater ROE. How are these claims possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola can be so over valued that its stockholder’s equity is just comparable to about 5% in the total rate in the company. The stockholder equity can be so small that almost anywhere of net gain will produce a favorable ROE.
Merrill Lynch however, has stockholder’s equity comparable to 42% in the rate in the company as well as a much higher net gain figure to make a comparable ROE. My point is always that ROE won’t compare apples to apples then is not a good relative indicator in comparing company performance.
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