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There are thousands of stocks trading on U.S. exchanges right now. And there are thousands more trading on major foreign exchanges. So there are clearly lots of opportunities out there at any given time.
The million-dollar question: How do you separate the wheat from the chaff? Heck, I spend every single day following the markets and researching great income investments … and there’s still no way I can easily study a fraction of the stocks out there!
To make matters worse, the biggest names tend to hog all the limelight from analysts and the mainstream media. So it’s extremely hard to find new, off-the-radar investment ideas, especially ones that will meet your personal investment goals.
Today, I want to tell you how you can whittle down a universe of stocks to a manageable group of names worth investigating more thoroughly …
The Wonderful World of Stock Screeners:
These Tools Are Powerful, Easy and Often Free!
Stock screeners are filtering programs that draw on databases of stored information, allowing you to search for investments based on pre-determined criteria. They’re both extremely useful and fun to play with.
In the old days, it took a proprietary system and either lots of tedious labor or a very powerful computer to perform a single stock screen.
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| It used to take a supercomputer to run a stock screen … now you can do it from your living room! |
Now, things are a lot different. Sure, investment professionals still have access to programs and software that give them more information than most. But the Internet has brought screening to masses, and many of the online tools are as powerful as some of the pro-level stuff.
In fact, plenty of websites now offer advanced tools and rich data sources absolutely free of charge. For example, Yahoo! Finance has an interactive stock screener that encompasses more than 150 different criteria. I think it’s very impressive, and worth checking out.
Other sites have quality screeners, too. Zacks Investment Research offers up a custom screener as does Morningstar, which includes the company’s analyst rankings as one of the possible criteria. Morningstar also offers a premium screener, which is available by subscription only.
You should also check to see if your broker offers its own proprietary screening tools. Fidelity provides one to its customers, for example.
Once You’ve Found a Screening Program,
What Kind of Criteria Might You Look For?
Some sites offer a number of pre-defined searches to help get you started. But in my experience, the most interesting (and relevant) results are produced when you select the criteria yourself. Let’s go through some basic items you might want to look for.
For starters, here are four fundamental items:
#1. A reasonable valuation — There may be no more important key to successful investing, than buying at the right price. And while there are plenty of ways to define “value” there’s no simpler or more readily available measure than the good ol’ price-to-earnings (P/E) ratio. The lower the number, the less money you’re paying for every penny the company earns.
#2. Great cash flow — Companies that bring in loads of cash are attractive. Simple, right? I often use free cash flow, which is the amount of money a company has after it pays all its normal costs of doing business (salaries, bills, capital expenditures, taxes, etc.).
#3. Low debt — You can use a company’s debt-to-equity ratio to tell you how much long-term debt it has. The higher the percentage, the more debt the company has. If you’re very conservative, you can search for companies that have a total debt to total equity ratio under 20%. Heck, there are some companies out there that actually have ratios of zero, indicating no long-term debt at all!
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#4. Solid profit margins — Simply put, this tells you how much of a company’s revenue becomes profit. It’s expressed in percentage terms … the bigger the number, the better!
If you’re after higher-growth companies, you might include — or substitute — other criteria. For example, you could screen for firms that have posted five straight years of double-digit sales gains or that have doubled their profits in the last year.
And since I’m such a huge fan of dividends, I can’t help but mention two of my favorite criteria in that area — above-average yields (as measured by a major index such as the S&P 500) and strong dividend growth over a five-year period.
Just for the fun of it, I decided to screen for all eight of the criteria I just described, limiting my search to companies in the U.S. In terms of specific cutoff points, here’s what I used …
- A P/E under 25
- Free cash flow of at least $200 million
- A dividend yield above 2.5%
- Positive five-year dividend growth
- Debt-to-equity under 20%
- Five-year sales growth above 10%
- Five-year profit growth above 10%
- A profit margin above 20%
You know what I came up with? Just two stocks … Paychex Inc. (PAYX) and Maxim Integrated (MXIM).
That’s right, only two companies met all those criteria! No doubt it was a rather tall order to begin with. But the beauty of stock screens is you can easily refine your search to expand the results or whittle them down further …
Let me show you by lowering the baseline dividend yield to 1.5% (still a nice little annual kicker!). The very same screen now gives out three more names. Here’s a table showing the results:
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Stocks with Growth, Value AND Dividends …
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| Name/Ticker |
P/E
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Debt-to-Equity
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Profit Margin
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Free Cash* Flow
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Dividend Yield
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| Microsoft/MSFT |
16.2
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0
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30.4
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19,145
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1.55%
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| Maxim Integrated/MXIM |
14.7
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0
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21.4
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481
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3.67%
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| Paychex/PAYX |
24.2
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0
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26.8
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600
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3.28%
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| Public Storage/PSA |
23.8
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19.71
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36.2
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747
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2.40%
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| T. Rowe Price/TROW |
24.6
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0
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26.4
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626
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1.60%
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*Trailing twelve-month, in millions
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My point is that you can tweak your screen over and over again until you get a list you like.
Is it a perfect system that picks the ultimate investments? Of course not. But it’s a great way to get some interesting names that have lot of things in their favor. You should always do a more thorough investigation before you make an investment decision.
I encourage you to experiment and see what you discover on your own. You can find investments that have strong momentum by specifying share prices that are at, or near, new highs. Or, if you want to see what companies have confident managers, you can screen for large amounts of insider buying. The possibilities are endless … the searches cost nothing … and the resulting information can prove very profitable.
Best wishes,
Nilus
P.S. Want to know what names I’ve selected for the Dividend Superstars portfolio? Subscribe now and get my entire list … 12 monthly issues of the newsletter … and a whole slew of special reports … all for just $39. Click here for all the details.
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Mathias Korzan, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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