This is committed to those of you who wish to invest in individual stocks. I would like to share with you the strategy I have used in the past to select stocks which i are finding to get consistently profitable in actual trading. I prefer to work with a blend of fundamental and technical analysis for selecting stocks. My experience has shown that successful stock selection involves two steps:
1. Select a regular using the fundamental analysis presented then
2. Confirm the stock is surely an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being above the 100-Day EMA
This two-step process raises the odds the stock you decide on will be profitable. It now offers a signal to market Chuck Hughes which has not performed as you expected if it’s 50-Day EMA drops below its 100-Day EMA. It is also a useful way for selecting stocks for covered call writing, yet another kind of strategy.
Fundamental Analysis
Fundamental analysis may be the study of financial data including earnings, dividends and your money flow, which influence the pricing of securities. I use fundamental analysis to help select securities for future price appreciation. Over recent years I have used many strategies to measuring a company’s growth rate in an attempt to predict its stock’s future price performance. I manipulate methods including earnings growth and return on equity. I are finding that these methods are certainly not always reliable or predictive.
Earning Growth
For example, corporate net earnings are susceptible to vague bookkeeping practices including depreciation, cash flow, inventory adjustment and reserves. These are all susceptible to interpretation by accountants. Today more than ever, corporations 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 the balance sheet for specific things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed product, etc. Many times these write-offs are certainly not reflected like a continue earnings growth but alternatively arrive like a footnote with a financial report. These “one time” write-offs occur with additional frequency than you could expect. Many companies which make up the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other indicator, which i’ve found is just 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 better).
Which company is much more successful?
Coca-Cola (KO) using a Return on Equity of 46% or
Merrill Lynch (MER) using a Return on Equity of 18%
The solution is Merrill Lynch by measure. But Coca-Cola has a much higher ROE. How is possible?
Return on equity is calculated by dividing a company’s net profit by stockholder’s equity. Coca-Cola is really over valued what has stockholder’s equity is merely corresponding to about 5% in the total rate in the company. The stockholder equity is really small that almost any amount of net profit will make a favorable ROE.
Merrill Lynch however, has stockholder’s equity corresponding to 42% in the rate in the company and requires a much higher net profit figure to produce a comparable ROE. My point is always that ROE doesn’t compare apples to apples therefore is not an good relative indicator in comparing company performance.
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