Stock Screening

Using a stock-picking system to screen for stocks was once done by hand going through a pile of paper company reports looking for positive attributes that the system said would cause the stock price to increase. It is now possible to search through every company report using a computer or web-based stock screener which will do it almost instantly.


Help Tip

If you do not know what a term means or how a ratio is calculated then have a look at the excellent glossary at Investopedia.



Value Investing Stock Screener

An Introduction To Stock Screening

The process of stock screening is using a computer database to find stocks that match certain criteria in this database. The information in the database will mainly come from the company’s published accounts but could include other information about factors such as price action.

Deciding on the criteria in a stock-picking system will be heavily influenced by investment style such as value, high yield, growth or price momentum. From this methodology to find winning stocks, a full stock picking system will be devised. Although most stock picking systems are a hybrid with criteria from more than one investment style.

A successful stock-picking strategy is likely to have good theoretical reasons as to why the stocks it picks should rise in value. This should also be proven by back testing the stock screen using past historical stock market data. As this may not be possible if you are using a free screener you can simply use a strategy that you know other investors have already had success from following.

There are a number of books that describe a stock picking system for personal investors to use that can be converted for use by a stock screener. These include Martin Zweig’s 'Winning on Wall Street' which is used in the following section to review a number of free stock screeners. Joel Greenblat’s Magic formula described in his bestselling book ‘The Little Book That Beats The Market’ has a website to stock screen using this system -

Computer stock screeners vary from simple html based screeners provided free of charge by Google Finance to costly stock screeners aimed at professional investors. Picking stocks can be an emotional activity and beginners can be attracted to so called glamour or story stocks which may seem to have a good chance at growing rapidly but a careful study of their accounts would show that they are expensive gambles.

You need to translate the stock-picking system into factors or criteria that you can put into your stock screen. (This could prove difficult with many of the published folksy explanations as to why Warren Buffett picks or rejects a stock.)

Stock Picking Image

How to use a Stock Screener

Stock screeners will have searchable criteria from fundamental and/or technical analysis. Most screeners have a bias in one of these directions and so some stock screeners are more suitable for a particular stock picking method.

These searchable criteria can include variables from different investment categories such as size, balance sheet factors such as the current ratio, profit margins such as the Net Profit Margin, growth rate, valuation ratios such as the P/E and also possibly price action and volume statistics.

If you do not understand them already, you will need to learn what these accounting or investing terms mean and their role in your stock picking system. Doing so will make you a better investor but it is possible to form an effective stock screen from factors given by a book advising on a stock picking method with only a beginner's understanding of finance or stock screening.

Stock screens are made up of qualifier expressions of a variable and a relationship and the base which is what the variable is compared against. An example is:
P/E less than 16 or P/E < 16

The variable in this case is the price-to-earnings ratio (P/E) and it has the relationship, operator or condition of being under the value of 16 which is the base.

The price-to earnings ratio can be calculated in different ways using the past four quarters of EPS to give the trailing P/E which is the standard form or the EPS figure comes from estimated earnings expected over the next four quarters to give the leading or projected P/E. A third variation uses the EPS of the past two quarters and estimates of the next two quarters. Make sure you know exactly how the ratio or criteria has been calculated and what it represents in your screen.

Most stock screens have hundreds of variable to choose and you can form the screen from many different qualifier expressions that test for different things. A good stock screener will allow complex expressions with a range of values such as greater than equal to more than one variable:
PE greater than or equal to 4 and less than or equal to 16 or PE >= 4 <= 16

Although some simpler screeners may allow you to write this on two lines:
PE >= 4
PE <= 16

The price-earnings ratio gives a valuation of a company's current share price compared to its per-share earnings. This criteria rules out companies with a P/E above 16 which is currently about the average and rules out companies with a P/E lower than 4 which are likely to be in serious financial difficulties with a greater than normal probability of going bankrupt. As companies that are losing money do not have a P/E, these are also ruled out by this criteria.

This is just one test based on value and a stock screen replicating a stock-picking system is likely to be made up of a number of such tests. The computer will have a universe or master list of companies to test upon. The first test will remove companies that do not match this test and the following test will then be on just this remaining list of companies. After each test is completed, the remaining companies are those that pass each test.

The stock screen should narrow down the possible candidates for investment that the stock screen finds to a manageable number. Screens are valuable for the companies they eliminate as well as the companies they select. This saves time compared with searching through a pile of company accounts.

What to look for in a Stock Screener

The better stock screens offer a significant database, a wide choice of criteria, relative as well as absolute parameters and flexibility in entering parameters and a number of preset screens. Relative percent changes are often more telling than absolute number changes. Some screens offer a selection of preset screens often based on some successful stock investor and they can be useful to see how the system works. The InvestSTRAT review found that free screeners that allowed a complex expression or a range to search upon did better than those that did not. Some free screens allow you to save your search for future use. Stock screeners that give you a report with the company name and the criteria that was screened upon allow you to check the accuracy of the screen and to sort the list of companies using the most important criteria.

The more sophisticated screeners will allow a further screen on the generated results, while the free screeners tend to leave you with just this first list of candidates. More sophisticated screeners will allow you to import a list of companies that can then be screened upon.

To work well stock screeners need up-to-date and complete information and a company can be slow to officially file such information which is then made available to the public and translated into the screen's database. For foreign companies where accounting standards are lax, the data could be years out of date. In can be very unclear how good the data used in the screener actually is.

A stock screen is only as good as the data and the honesty/reliability of the company providing it. However, professional investors have devised stock screens to search for companies whose accounts look too good to be true. However, these tend to be complex and beyond the tools and ability of most individual investors.

Stock screens like the figures in the company accounts can often tell you little about qualitative aspects such as brand loyalty or other dramatic changes in the company’s business environment such as changing laws. Supplement your stock screen with further research, looking at the graph of the company's share price performance and find out if there have been any 'insider trades' by the company's management.


Review of Free Stock Screeners Part 1