This is focused on people who want to spend money on individual stocks. I wants to share along the methods I have used over the years to select stocks that I have realized to get consistently profitable in actual trading. I want to use a mixture of fundamental and technical analysis for choosing stocks. My experience shows that successful stock selection involves two steps:
1. Select a standard while using the fundamental analysis presented then
2. Confirm that this stock is an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being higher than the 100-Day EMA
This two-step process increases the odds that this stock you select will be profitable. It also provides a transmission to market ETFs which includes not performed as expected if it’s 50-Day EMA drops below its 100-Day EMA. It is also a useful way of selecting stocks for covered call writing, a different type of strategy.
Fundamental Analysis
Fundamental analysis will be the study of financial data like earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to help you select securities for future price appreciation. Over time I have used many strategies to measuring a company’s rate of growth so that they can predict its stock’s future price performance. I have used methods like earnings growth and return on equity. I have realized these methods are certainly not always reliable or predictive.
Earning Growth
For instance, corporate net earnings are subject to vague bookkeeping practices like depreciation, income, inventory adjustment and reserves. These are all subject to interpretation by accountants. Today more than ever before, corporations are under increasing pressure to conquer analyst’s earnings estimates which ends up in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their own balance sheet for specific things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed developing the site, etc. Many times these write-offs are certainly not reflected as being a drag on earnings growth but alternatively appear as being a footnote over a financial report. These “one time” write-offs occur with more 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 top return on equity with successful corporate management that is certainly maximizing shareholder value (the greater the ROE better).
Recognise the business is a lot 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 solution is Merrill Lynch by any measure. But Coca-Cola features a greater ROE. How is that this possible?
Return on equity is calculated by dividing a company’s post tax profit by stockholder’s equity. Coca-Cola is indeed over valued what has stockholder’s equity is merely corresponding to about 5% from the total market price from the company. The stockholder equity is indeed small that almost any amount of post tax profit will make a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity corresponding to 42% from the market price from the company and requirements a much higher post tax profit figure to produce a comparable ROE. My point is the fact that ROE will not compare apples to apples so therefore is not an good relative indicator in comparing company performance.
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