This really is dedicated to those who want to spend money on individual stocks. I want to share with you the techniques Personally i have tried over the years to choose stocks that we have realized to be consistently profitable in actual trading. I like to work with a blend of fundamental and technical analysis for choosing stocks. My experience has shown that successful stock selection involves two steps:
1. Select a regular using the fundamental analysis presented then
2. Confirm that the stock is an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being higher than the 100-Day EMA
This two-step process boosts the odds that the stock you end up picking will likely be profitable. It also provides a sign to sell options that has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is a useful means for selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis may be the study of monetary data including earnings, dividends and money flow, which influence the pricing of securities. I use fundamental analysis to help you select securities for future price appreciation. Over recent years Personally i have tried many methods for measuring a company’s growth rate to try to predict its stock’s future price performance. I purchased methods including earnings growth and return on equity. I have realized that these methods usually are not always reliable or predictive.
Earning Growth
By way of example, corporate net profits are subject to vague bookkeeping practices including depreciation, cash flow, inventory adjustment and reserves. These are all subject to interpretation by accountants. Today more than ever, corporations they are under increasing pressure to get over analyst’s earnings estimates which ends up in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their balance sheet for such things as 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 make an appearance as being a footnote on the financial report. These “one time” write-offs occur with more frequency than you might expect. Many firms that make up the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other indicator, which has been found just isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a top return on equity with successful corporate management that’s maximizing shareholder value (the higher the ROE the greater).
Recognise the business is a lot more successful?
Coca-Cola (KO) having a Return on Equity of 46% or
Merrill Lynch (MER) having a Return on Equity of 18%
The answer then is Merrill Lynch by any measure. But Coca-Cola carries a better ROE. How are these claims possible?
Return on equity is calculated by dividing a company’s net gain by stockholder’s equity. Coca-Cola is so over valued the reason is stockholder’s equity is simply equal to about 5% of the total market price of the company. The stockholder equity is so small that almost any amount of net gain will develop a favorable ROE.
Merrill Lynch however, has stockholder’s equity equal to 42% of the market price of the company and needs a much higher net gain figure to create a comparable ROE. My point is ROE doesn’t compare apples to apples then is not an good relative indicator in comparing company performance.
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