The relentless Digital Age has blown up a tempest of financial information that whirls about investors night and day.
Some is important, some is blather. Regardless of the hour, if the power switches are on, the byte blizzard rages. As the movie, Wall Street reminds us – money never sleeps.
Much of the digerati engulfing the global investment mall is extremely valuable to investors; but not in its raw form, however. The numbers must be crunched, reordered into an army of achievements and ranks.
Stock Screening Is Massaging Financial Data to Get Investment Answers
To be really useful in modern stock selection, this financial DNA of listed corporations must be distilled into databases, ideally ones designed to rapidly identify stocks possessing attractive investment characteristics and others that are floundering.
This process is called stock screening. Before IBM introduced personal computers in 1981, only the stock sleuths working for institutional investors, with access to powerful computers, used screening. Now investors large and small can filter out which stocks to acquire or avoid, using stock screens found on many popular Web sites.
Investors Can Find Free Stock Screeners to Use on the Internet
The screens used for this article were created on the templates of one such site. It is among those listed below. Most are free.
- American Association of Individual Investors (AAII)
- FinWiz Financial Visuals
- Google Finance
- Market Watch
- MSN.com finance
- Yahoo! Finance
Even though a stock screener does the heavy lifting in sorting through thousands of equities, the investor has a vital part to play. While the screener will produce winners and losers, the investor must decide what criteria or filters will enable the computer to do its mighty job. These filters are also called the parameters of the screens.
The Investor Must Choose the Desired Stock Traits for the Computer to Select
So choosing the appropriate screens is the first step for the inquiring investor. Knowing what to look for is essential for there are numerous possibilities. For example, Yahoo! Finance offers 150 screening criteria.
Basically this means selecting what filters to activate, so that the program will collect and sort all stocks in the database that can make the desired grade, in items like dividend coverage, earnings growth and cash flow.
Most screeners online are similar. Some like Google Finance, Yahoo! Finance and FinWiz allow investors to export screening results to Excel spreadsheets. A screener’s stock universe generally combines the trading lists of the New York Stock Exchange (NYSE), the American Stock Exchange (ASE) and NASDAQ.
Online Stock Screeners Give Investors a Pool of 6,500 Stocks
That combination furnishes approximately 6,500 stocks in the grab bag, from which the screener can extract ones thought to have the right stuff for a portfolio or a one-shot investment.
The investor’s ultimate goal in screening should be to set enough filters for the computer to cough out stocks ranked highest, when total conditions are considered. This reduces the risk of making an investment decision based on a stock’s high rating in one or only a few criteria.
It is important to remember, however, that the greater the number of filters employed, the fewer candidates will survive the financial distillation.
Screening Programs with Excessive Criteria Can Eliminate All the Stocks
Here is an example of this principle in play, compiled from setting stock screens on FinWiz.com on February 20, 2011.
Let us imagine the Confucius Investment Club is a group of Chinese MBA students studying in the US. They are homesick. Besides, they want to go back and prosper from the investment boom in their mother country, which their grandparents warned them to eschew like foreign fortune cookies.
Instead of poring over Chairman Mao’s Little Red Book, as their grandparents advised, they preferred to follow the teachings of the venerable Chinese philosopher, Confucius, and often quoted the Chinese proverb attributed to him: “The gods cannot help those who do not seize opportunities.”
The Confuscius Investment Club Turns Down Chairman Mao
They decide to run a screening program, which they name “China Dolls.” Basically, these MBA whizzes are cautious, and decide to find five Chinese stocks with the highest price/earnings multiples, but ones valued at less than 15x current earnings per share. They rationalize such a tactic will discover only respectable out–of-favor stocks, selling at a discount.
They begin by clicking the “nationality” option on the program screen, setting up a filter for only Chinese stocks.
Next they indicate for a filter a price less than 15x current earnings per share.
An alphabetical listing of all Chinese stocks priced under 15x earnings appears, the highest of which are these five:
- Chinasure Inc. (CISG) Insurance Brokers, at 14.85x earnings
- LDK Solar Company Ltd. (LDK), a semiconductor manufacturer priced at 14.74x earnings
- WUXI Pharma Tech (WX), a drug supplier, valued at 14.13x earning
- Deer Consumer Products (DEER), a home goods maker with a multiple of 13.97x earnings
- Sinopec Shanghai Petrochemical Oil and Gas Company (PTR), trading at 13.82x earnings
Mindful of the tricky foreign exchange rate differentials between the US dollar and Chinese yuan, they decide to place buy orders on a major exchange, with many sellers and buyers and well-defined business ethics. They insert the next filter as the requirement the stocks trade on the NASDAQ.
This whittles down the group to Chinasure Inc. Insurance Brokers and Deer Consumer Products.
On the Sixth Screen the Stalemate is Broken and the Winner Appears
Looking to break the stalemate, they add an expected growth in excess of 10 percent over the next five years as a screen. Both companies qualify.
Hoping the next screen will select a winner, they insert the restriction that no greater than a 10 percent debt/equity ratio exists. But again, both companies survive the cut, reflecting their high quality.
Finally on the sixth screen – “Return on Assets” – Deer Consumer Product’s 21.90 percent convinces them to make the company the Confuscius Stock Club’s choice of the month.
Stock Screening Improves How Investors Use Computers and Achieve Performance
Screening practice is important but does not make investment skills perfect. It does make one proficient in using the power of high-speed computers, to home in on considerably more alternatives for inquiring investors.
As to attaining investment perfection, there is an old saying on Wall Street about buying derivatives to hedge investments that seems appropriate here. The only perfect hedge is found growing in a Japanese garden.