This can be committed to those which invest in individual stocks. I wants to share along with you the strategy I have used in the past to pick out stocks which i have discovered to get consistently profitable in actual trading. I want to work with a combination of fundamental and technical analysis for choosing stocks. My experience has shown that successful stock selection involves two steps:
1. Select a standard using the fundamental analysis presented then
2. Confirm that this stock can be 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 this stock you choose will probably be profitable. It now offers an indication to trade options which includes not performed needlessly to say 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 may be the study of financial data for example 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 the years I have used many options for measuring a company’s growth rate in an attempt to predict its stock’s future price performance. I purchased methods for example earnings growth and return on equity. I have discovered the methods aren’t always reliable or predictive.
Earning Growth
By way of example, corporate net income is at the mercy of vague bookkeeping practices for example depreciation, cash flow, inventory adjustment and reserves. These are at the mercy of interpretation by accountants. Today as part of your, corporations they are under increasing pressure to get over analyst’s earnings estimates which leads to more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their balance sheet for specific things like failed mergers or acquisitions, restructuring, unprofitable divisions, failed product development, etc. Many times these write-offs aren’t reflected like a continue earnings growth but show up like a footnote with a financial report. These “one time” write-offs occur with increased frequency than you might expect. Many businesses that constitute the Dow Jones Industrial Average took such write-offs.
Return on Equity
One other indicator, which I have found isn’t 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).
Recognise the business is 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 much higher ROE. How is that this 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 just add up to about 5% in the total market price in the company. The stockholder equity is so small that nearly any amount of net gain will create a favorable ROE.
Merrill Lynch alternatively, has stockholder’s equity add up to 42% in the market price in the company and needs a much higher net gain figure to make a comparable ROE. My point is ROE will not compare apples to apples so therefore isn’t a good relative indicator in comparing company performance.
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