Stock Screens (2)

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We explored the general idea of stock screens in the last blog, Stock Screens (1).  Essentially, stock screening is a process of elimination.  With each new metric you add, the number of companies meeting your requirements is reduced.  This is the first research step for a fundamental investor.  For this blog, I will set up a stock screen and report how it winnows the number of stocks available in the market down to stocks I might want to research further.  I will use the stock screen option offered by my on-line brokerage company.  The different criteria I set for my screen will be identified in bold.

I will start by selecting the stock exchanges I want to search.  Under Basic Criteria I will choose the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the NASDAQ and the over the counter market (OTC).  That results in a total of 7,029 stocks.  There are other types of Basic Criteria I could add, but I'll just use exchanges for illustration purposes.

Although I do my own stock research,  I know that many investors rely on what research analysts have to say.  Therefore, I want companies tracked by Wall Street since it is hard to make money on a stock if nobody has heard about it.  It helps if analysts follow a company and bring it to the attention of the investing public.  I will add Analyst Ratings, specifically, the Standard & Poors (S&P) Earnings and Dividend Rankings.  I want to see companies rated from B to A+ by S&P.  I pick this range of ratings solely for purposes of example.  An individual investor must decide what, if any, rating level to use in limiting his or her search.  This reduces the number of stocks to 1,417 companies meeting just these two requirements.  Similarly, I will select Analyst Coverage and set it at a minimum of five analysts covering the companies.  This reduces our group of companies 897.  At this point, the screen is not identifying specific companies, just the number meeting the three criteria I have set so far.

Now I look at Company Performance.  I set two categories in this section: Revenue Growth History for the past five years and Earnings Growth History for the same time period.  I choose a minimum of a 15% growth rate.  A Revenue Growth History of 15% or better lowers the number of companies to 193 and a similar requirement for Earnings Growth History drops the number to 103.  As you can see, the number of companies is lowered with each new financial metric I add.

The next available criteria is Price Performance.  Since I am just trying to narrow the field of companies to look at, I am not going to pay any attention to price at this point.  If price is a factor, I can look at that once I have my list of companies.  Therefore, I do not select anything from this section.

The sixth general criteria I will look at is Valuation.  Here is where we can pick companies with the ratios discussed in the books on fundamental analysis we have previously reviewed.  To keep things simple, I am going to select only one; the price/earnings ratio for the trailing twelve months (TTM).  I will set it at 20 or below.  This reduces our field of stocks to 72.

I now limit my search based on Financial Strength.  This field includes quite a number of criteria, but, again, I am going to choose only one; a return on equity of 20% or better.  The resulting number is now down to 64 companies meeting all of the measures I have established so far.

The final section is Technicals, but since we are approaching this exercise as a fundamental analyst might, I will skip this section.

My final step is to hit the "View Matches" button.  The stock screen provides a list of the companies matching my criteria and providing specific criteria information for each company.  How much easier can it get?

Although the screens provided by brokerage houses are very comprehensive, there are also some basic stock screening programs available on line.  These are provided at no charge.  If you wanted to experiment constructing your own screen, you could go to http://www.google.com/finance/stockscreener.  To set up your own stock screener, use the "Add Criteria" button on this screening site.

Next week, we will discuss what to do after you have your screen list of possible investment candidates.

Comments are always welcome.