That is committed to those of you who want to invest in individual stocks. I would like to share together with you the methods I have tried personally over the years to select stocks that I have discovered to be consistently profitable in actual trading. I like to utilize a mixture of fundamental and technical analysis for selecting stocks. My experience indicates that successful stock selection involves two steps:
1. Select a stock with all the fundamental analysis presented then
2. Confirm that the stock is definitely an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being over the 100-Day EMA
This two-step process boosts the odds that the stock you select is going to be profitable. It even offers an indication to trade options that has not performed needlessly to say if it’s 50-Day EMA drops below its 100-Day EMA. It is also a useful method for selecting stocks for covered call writing, a different sort of strategy.
Fundamental Analysis
Fundamental analysis could 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 recent years I have tried personally many methods for measuring a company’s growth rate so that they can predict its stock’s future price performance. I manipulate 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 profits are susceptible to vague bookkeeping practices such as depreciation, cash flow, inventory adjustment and reserves. These are susceptible to interpretation by accountants. Today as part of your, corporations they 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 his or her balance sheet for things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed website, etc. Many times these write-offs are not reflected like a continue earnings growth but rather make an appearance like a footnote with a financial report. These “one time” write-offs occur with an increase of frequency than you may expect. Many firms that make up the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other popular indicator, which I have found is not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a top return on equity with successful corporate management which is maximizing shareholder value (the greater the ROE the greater).
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 reply is Merrill Lynch by measure. But Coca-Cola carries a greater ROE. How is 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% with the total market value with the company. The stockholder equity can be so small that just about any amount of net gain will create a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity comparable to 42% with the market value with the company and requirements a much higher net gain figure to make a comparable ROE. My point is the fact that ROE doesn’t compare apples to apples therefore is not a good relative indicator in comparing company performance.
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