Review of Free Stock Screeners

Part 1

Zweig used an eclectic methodology to pick stocks on value, price action and even considered insider transactions. It is known that such stock picking methodologies work well in certain market conditions but at other times do not do as well as the market index.

I have set out the factors Zweig looked for and tried to use the same factors in six free stock screeners and then a year later measured their performance. This is an attempt to review their effectiveness and explore some of the factors Zweig used to pick stocks. Most stock screeners take either a fundamental or technical analysis view and so are just not suited to some stock picking methodologies.

Growth Factors

Zweig searched through the quarterly study of earnings and looked for reasonable growth in both revenues (sales) and earnings per share. These should have increased from the last quarter. If earnings do not keep pace with sales it may mean that the company is facing heavy competition. Zweig looked for stability of earnings and if several quarters were lower then he avoided this share.

Valuation

Zweig looked for a company with a P/E ratio not greatly above the average for the whole of the stock market. Zweig recognized that P/E ratios can be more expensive in boom times and cheaper in recessionary times. He also ruled out companies with very low P/Es as these are more likely to have severe problems and could go bankrupt. Zweig was willing to pay slightly above the average for a growth stock.

Price/Action

Zweig wanted relatively strong price action or momentum by the stock. He was not a technical analyst and did not look for chart formations but wanted stocks that are acting better than the market. Zweig looked for decent volume for the stock so that it did not become stale.

Zweig said that recognizing the relationship between trends and the industries that might benefit from them can lead to above-normal returns.

Insider Transactions

Zweig looked for buying by insiders or at least the lack of heavy selling by insiders. This information is not something you can easily screen upon, especially using free screeners.

You will manually have to check each company that the stock screen identifies on a website which lists this information such as MSN Money and check that none of the senior managers have recently sold or purchased in their company. If you find that the senior management has recently heavily bought their company’s share then Zweig considered this a major plus. Checks for insider buying or selling in the previous three to four months was made. This strategy is only possible in the US and UK where investment rules force senior managers to disclose what they buy.

To allow an examination of the idea that these insider transactions are important the data set from these Zweig screens was manually screened again using two different tests. A further group of stocks was formed by removing all the insider transaction sells but leaving mixed sells and purchases. A second test group was formed by only removing companies that had insider transaction sells that came to at least $5 million including companies which also had insider transaction buys. This is an arbitrary cut-off figure designed to ignore the most minor sells in this set of figures.

As well as the original screened companies, a further group of stocks was formed by removing all the insider transaction sells but leaving mixed sells and purchases. A second test group was formed by removing companies that had insider transaction sells that came to at least $5 million including companies which also had insider transaction buys. This is an arbitrary cut-off figure designed to ignore the most minor sells in this set of figures. These test groups allows an examination of the idea that these insider transactions are important and should be considered when using a Zweig style stock screener.

Be warned that it has been known for senior managers to keep buying their stock all the way down to bankruptcy. For it to work as an indicator it should be used in combination with other factors to make a balanced purchasing decision.

Using Free Stock Screeners

As a comparison exercise a number of free stock screeners were used to produce a Zweig style stock screen. It is not possible to form exactly the same stock screen for each screening tool as each has different factors that can be used. (It may be possible to devise a better Zweig screen for these stock screeners.) Few stock screens allow quarterly results so a much longer time period had to be used. The stock picks given by each screener on February 20, 2012 were recorded with actual prices on the following day of business. Closing stock prices were recorded after six months and a year and then how much each share gained or lost was calculated. (Please do not use the resulting data as stock picks as they will be out-of-date.)

Even though most screeners shared three to four results with other screeners and Apple Inc (AAPL) appeared in all of them it was striking how different the results were from each other. One reason could be that even slightly different criteria will produce very different results. Another factor could be that the databases and how up-to-date they are, vary from screener to screener.

A number of companies the screeners found were taken over during the year. For these companies, the percentage gain on the last day they were traded was used and the result was not annualized as further such gains are unlikely and it would be equally possible to invest next in a share that falls in value.

Dividends have also been ignored. Zweig was looking for growth companies whose stock market value would increase and did not consider dividends. Clearly many of the companies did pay dividends and this would result in a marginal increase in the gain of each portfolio.

 

Review of Free Stock Screeners Part 2