Introduction to Stock Screens

Posted on 07/08/2010

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Stock screens are a way of searching for a group of stocks that meet specific predetermined criteria. For example, an investor might want to search stocks in the retail sector with dividend yields of greater than 4%, price-to-earnings ratios of less than 12.5x and net debt-to-equity of less-than 1x. The screen will than produce the results of all the companies meeting these criteria. They are therefore an excellent way of finding stocks that meet with a particular investment strategy.

In the past stock screens were only available on professional platforms such as Bloomberg or Reuters, and even then these required programming skills on the part of the user; however, the proliferation of internet access and more freely available data from many of the major stock exchanges has meant that many websites aimed at the retail investor now offer such services for free. Examples include Google Finance (http://www.google.com/finance/stockscreener) for US stocks, Digital Look (http://www.digitallook.com) for European stocks and ADVFN (http://www.advfn.com) for UK stocks, with Google Finance being by far the most user-friendly.

Some issues to be aware of when using the screens:

  1. Incorrect Data. Because stock screens usually rely on data reported at the end of the last quarter (or half), any more recent changes are rarely reflected in the results. Therefore events such as M&A or capital markets activity can signficantly distort the output of these screens. Consequently, it is advisable to check recent stock marke announcements for any major events that may impact the calculations.
  2. Qualitative Issues. Some companies may suffer from problems such as management in-fighting, hostile shareholders, strategic uncertainty, etc, which will never show-up in quantitative stock screens. Therefore investors should check news reports (a search on Google will usually suffice for large companies) for any such issues.
  3. Non-modelled metrics. Sometimes the most important financial metric for a particular company could be one which isn’t part of the stock screen – for example, leverage metrics such as assets/equity ignore the cash generation ability of the companies in question, discriminating against those with better cash conversion. Or alternatively, measures that focus upon EBITDA may ingore associates and equity-accounted subsidiaries, underestimating profitability. This again emphasises the importance of qualitatively assessing the outputs from a stock screen.
  4. Off-balance sheet assets/liabilities. Some metrics will simply never show up stock screen. For example, details surrounding derivative positions, operating leases, capital commitments, pension fund liabilities, debt maturity dates can only be found in the notes to the financial statements. Investors (professional & amateur) often get bitten by issues such as these.

In future postings I’ll be executing a number of different stock screens and discussing some of the results.

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Posted in: Stock Screens