V.10:6 (239-242): Stock Selection by Arthur A. Merrill, C.M.T.

V.10:6 (239-242): Stock Selection by Arthur A. Merrill, C.M.T.
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Stock Selection by Arthur A. Merrill, C.M.T.

How does a veteran technician like Arthur Merrill select stocks for investment? He explains that it's not the simplest of methods and it does require research and work, but the results, he notes, are worth it—his growth stock index started at 874 in 1965, at the level that the DJIA was back then; when the DJIA reached 3169 recently, Merrill's index hit 15,149!

I have been asked how I pick stocks for investment. I have a definite preference for growth stocks — stocks that have been delivering a consistent and rapid growth in earnings per share (EPS). This preference limits me to specific parameters. It rules out turnaround situations, which can be profitable. It rules out stocks that are bargains because of temporary poor performance. However, adhering to the policy appears to outperform the Dow Jones Industrial Average (DJIA) handsomely over the years. I started a price index of a group of growing companies back in 1965, when the DJIA was at 874. I started my growth stock index at the same figure. When the DJIA reached 3169 recently, my growth stock index had achieved a level of 15,149!

I check the earnings record of each potential stock over the past five years. If there has been a decrease in any year, the stock is deleted from the list of potentials. I check the earnings quarterly over the last two years; if the EPS in any quarter is lower than in the same quarter of the preceding year, the stock is again deleted from my list. A regression line is then fitted to the earnings per share, and the most rapid are pulled out for me to study further.

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