Monday, July 30, 2007

Unlock Stock Market Profits - Key #2

This is the second in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this second post, we will continue along the path of finding stocks that seem to have some potential. The first post in this series discussed how to use unusual activity to identify investing ideas. This post will focus on the use of stock screeners.

Key #2: if you think you know what characteristics make a good investment, use a stock screener to get a list of stocks matching your specific criteria.

There are two kinds of screeners: those that are pre-built and those that are configurable.

Among the ones that are pre-built, you will find that different sites provide different variations and it is worthwhile to know which site offers which screener. This way, when you are looking for a particular kind of investment you will know where to look first for the simplest solution.

There is a similar situation with respect to interactive, configurable screeners. Some have more capabilities than others or just plain different characteristics than others. Once again, it is useful to try a bunch of them and settle on a few that you return to and learn to use really well.

To start off, we need to define what characteristics we feel are important enough to use in our screener. First, let's start by saying we are looking for a profitable company. Second, we would like it to be a large-cap stock; ie, at least $5B market capitalization. Third, we would like to see a per share price of at least $10. Fourth, let's say we would like to see earnings or sales growth of at least 10% or 20% year-over-year. This kind of screen will tend to identify companies already in an up-trend.

A Simple Stock Screener

Let's start with the screener at AOL. In order to plug in our criteria, though, we will need to do some interpretation. We say we are looking for a profitable company. With this screener, that could translate into one of a couple different criteria. We will use EPS = $.25 to $.75. Market Capitalization is one of the criteria so we just choose Large-Cap. We will choose a stock price range of $10 to $25. Finally we choose 1 year sales growth of 10% to 25%. This combination fairly well matches the criteria we set forth in the introduction.

This screen yields a list of about 16 stocks including:
  • Yahoo (YHOO)
  • Motorola (MOT)
  • EMC Corp (EMC)
  • Cadence Design Systems (CDNS)
  • STMicroelectronics (STM)
  • China Unicom (CHU)
  • Southwest Airlines (LUV)
  • Kinross Gold (KGC)
  • BEA Systems (BEA)
  • Flextronics (FLEX)
  • China Grentech Corp (GRRF)
  • Taiwan Semiconductor (TSM)
  • and a few more
An interesting list but there are a number of stocks that have disappointed lately. Let's see what we get with a different screener.

Getting a little more complex...

For a more complicated screener, let's look at the one at CNBC, which has 9 different categories with several criteria within each category. We'll use this stock screener to find a large cap with a good growth rate and little debt. That translates into the following criteria:

  • Company Overview / Market Cap > $5B
  • Growth Trends / Revenue Change QoQ > 20%
  • Growth Trends / EPS 1yr Growth > 20%
  • Reported EPS > $0.50
  • Financial Strength / Debt to Equity = lowest in the industry

This screen yields a list of 6 stocks (name/symbol/industry):
  • Blackrock, Inc. (BLK) - Asset Managers
  • Franklin Resources (BEN) - Asset Managers
  • Garmin LTD. (GRMN) - Consumer Electronics
  • McDermott International (MDR) - Heavy Construction
  • MEMC Electronic Materials (WFR) - Semiconductors
  • Smith & Nephew PLC (SNN) - Medical Equipment

We now have a small manageable list of companies in a range of industries. Note that this list is shorter and completely different than the list we generated using the AOL screener. Most of the criteria used in the two screeners were similar; however, with the CNBC screener, we looked for a company with little debt. Look what a difference that resulted in!

A more complicated, interactive stock screener

Moving further along the complexity spectrum from the AOL screener is the screener at Zacks.com

This screener has a tremendous amount of flexibility. It has 16 separate categories and each category has a number of criteria within it.

Let's set up our basic list of criteria in the Zack's format. We will use the ones we used for the AOL screener and eventually add a few to refine our search and try to target companies experiencing good growth.

Category / Criteria / Value:
  • Company Descriptors / Market Cap ($M) > 5000
  • Growth Trends / This year's estimated growth > 20%
  • Growth Trends / Last year's growth > 20%
  • Reported EPS > $0.50
  • Fundamentals / Debt to Equity <= 20%
This screen yields a big list that includes some but not all the stocks we have seen on the prior two lists. Let's add another criteria or two and see what we get. We will add a requirement that the stock have a PEG less than 2 and Average EPS Surprise (Last 4 Quarters) greater than 20%.

Well, we get still another unique list. This time it is much shorter and only includes the following:
  • Apple (AAPL)
  • Foster-Wheeler (FWT)
  • Mastercard (MA)
  • McDermott International (MDR)
  • Morgan Stanley (MS)
Note that McDermott International was also on the list at CNBC. A snapshot description of the company: McDermott is an engineering and construction company, with specialty manufacturing and service capabilities, focused on energy infrastructure. We'll need to do our homework to further research this stock and perhaps others on the list until we find one we are comfortable investing in.

Conclusion

As can be seen, choosing a particular screener and learning how to use it can result in targeted lists of investment ideas. Getting familiar with the terminology and criteria each screener uses is very important and is key to getting the most out of each of them.

Experimentation is encouraged. Starting with a simple, basic set of criteria and working to adjust or add to the list of criteria can yield more focused results that match your investing style.

Note also that different screeners yield different results. Playing with a few different screeners will help you develop a level of confidence in the one you ultimately choose as the best of breed.

Finally...

An area we did not explore but should be on the top of your list to learn is the list of common financial ratios (we only used the debt-to-equity ratio). Most screeners offer at least a few of them and a good grasp of what they mean and in what range good numbers might fall will increase your ability to use stock screeners successfully.

The TradeRadar list of screeners:

AOL - AOL provides a simple screener and an interesting set of pre-configured screens

Morningstar - offers a screener that lets you search for stocks using many of the famous Morningstar criteria

MarketWatch - simple, easy to use screener

CNBC - offers a stock screener and a mutual fund screener. Most interestingly, there is also an earnings screener which provides screens and a daily view of analyst upgrades/downgrades/revisions, reported and expected earnings.

SharpScreen.com - this is an excellent, interactive screener that provides explanations of criteria and offers good flexibility. Also available on the NASDAQ site.

Guru Screener - Pick 'em like the market guru's do using this screener at the NASDAQ site

WSJ ETF Screener and WSJ Mutual Fund Screener - Two screeners from the Wall Street Journal Online - one for ETFs and one for Mutual funds

Stock Research at MSN Money - Three good screeners are available here under the Find Stocks heading: the interactive Stock Screener, predfined Power Searches and, under Top Ranked Stocks, there are lists of picks based on the StockScouter ranking system.

Most Actives at Quote.com - This is a good place to find ideas among stocks that are showing unusal activity: gainers and losers, unusual volume, yearly highs or lows, stocks with unfilled gaps, most volatile, etc.

Tools at Schaeffer's Research.com - Lots of pre-built screens based on Bernie's Put/Call Open Interest Ratio analyis techniques. Options are a focus on this site, often to use as a guide for analyzing stock performance. Sometimes, a contrarian point of view is expressed and that is useful as a counterbalance to the accepted market wisdom of the day.

Zacks.com Screening - Has both a Custom Screener that is interactive and a set of Predined Screens that includes some you may not see elsewhere (change in analyst recommendations, for example).

StockCharts.com Predefined Scans - Screens based on technical indicators, candlestick patterns and point and figure patterns. Includes stocks on major indexes (including Canadian) and mutual funds.

ClearStation : Tag & Bag - Tag & Bag consists of lists of stocks, screened and sorted according to a multitude of criteria. Using their 3-Point Investing approach, it organizes the lists into technical, fundamental and ClearStation community events.



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