Stock Selection

This is focused on those of you who want to spend money on individual stocks. I would like to share with you the strategy I have used over the years to select stocks i are finding being consistently profitable in actual trading. I like to work with a mixture of fundamental and technical analysis for selecting stocks. My experience indicates that successful stock selection involves two steps:

1. Select a regular using the fundamental analysis presented then
2. Confirm how the stock is definitely an uptrend as indicated by the 50-Day Exponential Moving Average Line (EMA) being higher than the 100-Day EMA

This two-step process raises the odds how the stock you select will be profitable. It even offers a sign to market Automatic Income Method 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 could be the study of monetary data including earnings, dividends and cash 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 means of measuring a company’s rate of growth so as to predict its stock’s future price performance. I have used methods including earnings growth and return on equity. I are finding why these methods usually are not always reliable or predictive.

Earning Growth
As an example, corporate net profits are at the mercy of vague bookkeeping practices including depreciation, cash flow, inventory adjustment and reserves. These are all 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 results in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their own balance sheet for such things as failed mergers or acquisitions, restructuring, unprofitable divisions, failed product, etc. Many times these write-offs usually are not reflected as a continue earnings growth but arrive as a footnote over a financial report. These “one time” write-offs occur with increased frequency than you might expect. Many businesses that form the Dow Jones Industrial Average have taken such write-offs.

Return on Equity
One other popular indicator, which i’ve found is just not necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates an increased return on equity with successful corporate management that is certainly maximizing shareholder value (the higher the ROE the better).

Which company is more successful?
Coca-Cola (KO) with a Return on Equity of 46% or
Merrill Lynch (MER) with a Return on Equity of 18%

The answer then is Merrill Lynch by any measure. But Coca-Cola carries a much higher 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 so over valued that its stockholder’s equity is just equal to about 5% of the total market price of the company. The stockholder equity is so small that nearly any amount of post tax profit will produce a favorable ROE.

Merrill Lynch on the other hand, has stockholder’s equity equal to 42% of the market price of the company and requires a greater post tax profit figure to make a comparable ROE. My point is that ROE won’t compare apples to apples so therefore is very little good relative indicator in comparing company performance.
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