Stock Screening 101
Investors are always looking for more ways to find great companies and stocks. If you find that your amateur’s edge isn’t quite enough another option is stock screens.
Before we jump into the world of stock screens it is important to understand that a stock screen is just a computer matching different stocks with criteria that you set. You should never buy a stock just because it comes up on a certain screen. Stock screens are just the beginning of your research.
There are many different stock screening programs out there. At StockBoxFinancial we use the free stock screener from Yahoo Finance. This program is really simple and really easy to use. You simply pick your criteria and the screener spits out all the stocks that match.
The more criteria you add, the fewer stocks the screener will return.
There are almost an infinite number of combinations for screens you can search for, but here are the items we often search for:
Market Cap: Whenever you do a search you should always specify a market cap range. For example, if you are looking for a fast grower you will want to set the market cap under something like five billion.
Industry/Sector: If you feel you have an amateur’s edge in a particular sector this criteria will be particularly helpful. By setting the industry criteria the screener will only return stocks in the sector that you have specified.
Growth Rates: You can specify the screener to return stocks based on past or the future growth rates that analysts estimate. Both options can bring fruitful returns.
Price/Book: When you are looking for a value play, price/book is the criteria you want to use. The combination of price/book and a sector criterion may help you eliminate situations where price/book overestimates the value of the firm’s assets.
Profit Margin/ROE: Often times we like to search for a minimum profit margin to find competitively strong companies.
P/e ratio: With almost every screen we set a maximum p/e ratio to eliminate overpriced companies.
Overall, there is no right way to screen for stocks, and screeners usually return a lot of bad companies. Screening is a powerful tool and the more you do it the better you will get at it, but you need to use it with caution. Remember that stock screening will never be as effective as you amateur’s edge.