This really is specialized in those of you who would like to spend money on individual stocks. I would like to share along the techniques I have tried personally in the past to pick stocks that we are finding being consistently profitable in actual trading. I like to utilize a mix of fundamental and technical analysis for selecting stocks. My experience shows that successful stock selection involves two steps:
1. Select a regular while using fundamental analysis presented then
2. Confirm the stock is surely an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being across the 100-Day EMA
This two-step process raises the odds the stock you select is going to be profitable. It now offers an indication to sell stock containing not performed as 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 will be the study of economic data including earnings, dividends and cash flow, which influence the pricing of securities. I use fundamental analysis to assist select securities for future price appreciation. Over the years I have tried personally many methods for measuring a company’s growth rate in an attempt to predict its stock’s future price performance. I have used methods including earnings growth and return on equity. I are finding the methods aren’t always reliable or predictive.
Earning Growth
For instance, corporate net profits are at the mercy of vague bookkeeping practices including depreciation, cash flow, inventory adjustment and reserves. These are common at the mercy of interpretation by accountants. Today more than ever before, corporations they 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 the balance sheet for specific things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed developing the site, etc. Many times these write-offs aren’t reflected as being a continue earnings growth but rather appear as being a footnote on the financial report. These “one time” write-offs occur with additional frequency than you could possibly expect. Many firms that form the Dow Jones Industrial Average have taken such write-offs.
Return on Equity
Another popular indicator, which i’ve found is just not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates a higher return on equity with successful corporate management that is certainly maximizing shareholder value (the greater the ROE the greater).
Which company is much 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 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 income by stockholder’s equity. Coca-Cola is so over valued what has stockholder’s equity is simply equal to about 5% of the total market value of the company. The stockholder equity is so small that just about anywhere of net income will produce a favorable ROE.
Merrill Lynch conversely, has stockholder’s equity equal to 42% of the market value of the company as well as a greater net income figure to create 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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