Welcome to session 22 of the Investing for Beginners podcast. In today’s session we are going to discuss how Andrew and I like to use a stock screener. Our stock screener of choice is finviz.com, this is a free screener that we use to help us find all kinds of great stocks to invest in. It is super easy to use and very flexible as well, great for beginners as wells as more experienced investors.
Andrew has a great ebook that we have discussed several times that has some great insights into how to screen for great stock ideas. It has been foundational to me to help me set up my Monday morning ritual to screen for stocks.
- How to use finviz.com
- What are the best metrics to use for a screen
- How to be flexible with your screening procedures
- Finding new investment ideas using a stock screener
- Remembering that stock screeners are just a tool
Andrew: Well, I guess we have different rituals because mine is to hit the snooze button multiple times in the morning. A screen is a great way to get some ideas, my site is focused on beginners, and I used to get this question all the time.
I’ve written blog posts about this question, and it’s a valid question and something that always pops up, and it’s a struggling point for a lot of beginners. Where do I get ideas for stocks? I might have this toolkit, ability to sift through the financial data and find an intrinsic value and search for a margin of safety.
There are so many stocks out there, so many annual reports and there are thousands of words in these annual reports, too much data, too many companies, too many options. So how do we narrow that down and a stock screener is the best way to do it.
There are a couple of different screeners that you can use. The one that I prefer is called finviz.com; you can type it in to follow along with us while we are doing it together. I won’t go through this blow by blow, but I will give some commentary along the way to help guide you along.
I pull finviz.com, and right away there are 7094 stocks, it is a great start. This particular screener focuses primarily on the US stocks; it does have stocks from other countries. For example, there is France, which all of are traded on the NASDAQ.
It has this tilt towards the US where even if it’s a company based in a different country, it’s going to be traded on a US exchange, either NASDAQ or such. This makes it simple for me because I am obviously focusing on US stocks, all American all the way.
I have seen UK screeners, which some readers of mine have suggested I look into, these can allow you to do some basic research and figure out how that relates to your situation.
Something that I like to do right away, because I am all American I just straight off the bat go to the drop down where it says country and me set it to the USA. We’ve talked about that in the past, makes taxes simpler, and I think they are the company to own and have been for the past couple hundred years.
That narrows it down to about 6200, the next one I like to look at is a market cap, and this is something that we can kind of debate a little bit. There is a lot of different ideas, generally when you hear about the blue-chip stocks, big business stocks or the ones that they talk about in the media.
They are talking about these stocks that have market capitalizations of $200 Billion plus, think stocks like Microsoft, Google, Johnson & Johnson, any of these strong and steady stocks. That is the range, and then it goes kindly varies.
The range goes down to $2 Billion to $500 million, my range that I like to use and I stick to this probably 90% of the time. It’s going to be $2 Billion or above, the way that I look at it, and if you look at my eLetter portfolio.
I just wrote an email about this the other day; I only have two positions that are in the $200 Billion plus range, all the rest are in that $2 Billion to $200 Billion sweet spot. I like it because number one the smaller size you get, the fewer analysts coverage there is. Because the money is just not there compared to the bigger stocks.
There is a better chance there because the company is not as widely covered, that their growth and business health isn’t as appreciated as it should be by the market.
Secondly, on the flip side of that, you don’t want to go to small because there is the risk that a stock either gets swallowed up or when a stock is at such a small size, and it’s a player in the market, and if you have the big three competitors in the market.
It’s tough to dominate market shares when you are such a small player, so that’s why I tend to stay away from anything under $2 Billion and obviously there are the risks that come with a smaller stock.
The volatility tends to be higher, I just see this $2 to $200 Billion range as the sweet spot and generally when you talk about small cap to mid cap that’s what all the books tend to say. It is debatable as far as the actual jargon.
There have been studies that show that size can do well, has proven to do well on back testing. And for me, that is where I have found a lot of great deals when I am screening. That is why I like to go there when it comes to market cap.
Dave: I am right there with you on that, with the market cap. I stick roughly in the same range, although I may dip a little below that on occasion, just for giggles to see what’s out there, and what’s available.
Maybe if I am stuck in a rut, and finding the same fourteen companies every single week, I may expand my market cap to give me possibly some more options. I will never really go a whole lot below that; I may go down to the $750 million market cap or a little below that.
Once that I start getting below that market cap I start to get nervous because there is a lot more volatility and risk. Additionally, there is a larger chance they are going to be acquired by a bigger fish in that field.
There have been some occasions where I’ve gotten some really good deals a little bit below that. I have one of my purchases that were recently acquired by the owners of another company. The nice thing was that price of the stock jumped from around $7.50 a share to almost $13 a share.
That means that I am going to make a nice little profit from this investment, which is awesome but the company is going to be sold soon, so I will need to find him another player in that market.
It comes down to your risk tolerance and how much you can handle the ups and downs. The other aspect to that too is the smaller you get you’re also going to have opportunities where you’ll have companies are not going to trade hardly at all.
That’s not a good place to be because there is no activity on it so that you might be sitting in the stock and their maybe no movement on the price on it for a very long time, and that’s not really where we want to be either. I wanted to make a note of what Andrew was saying about the analyst’s reports.
That is something that is very important to consider because the less coverage there is, the more opportunity for you to find that hidden gem, and I know that is something that Andrew focuses a lot on with his eLEtter.
I think that is a great place to be for a value investor because one of the things we are always looking for are those companies that are ignored or beaten down a little bit in the market. When you are looking at these companies that are not followed very much by the analysts. Then you are going to have more of an opportunity to find something that can have a really big chance to grow.
If you do your research and find that company that has been ignored in the market for a long time, then that is going to give you an opportunity to do some really good things.
The Johnson & Johnson (JNJ) and some other of those big blue chip companies, the movement on those are going to be a lot more gradual and less noticeable, where with some of these smaller companies you could get a big bang out of them very quickly.
Andrew: Yeah, it’s a great way to kind of scoop up value if you want to use that metaphor. Make some gains.
For the sake of this podcast episode, I am going to do the over $2 Billion which narrowed the field from about 6000 stocks down to 1350, so you can see once you get below the $2 billion mid-cap range there is just so many stocks that you can choose from.
The next thing I like to do because I am 100% pro-dividend is there is a dividend yield component, and I always make sure that is a positive number. Again that’s a debate for another time, that is something that can narrow down the list of stocks as well and make sure I am always getting a dividend payment.
I don’t care too much about the yield, because if I am buying a company that is growing and they will tend to grow their dividend. I want to see that double compounding interest, and I understand that because I have a long-term mindset, something with a low yield but growing over a long period can easily beat out something that had a higher yield, but stagnates or cuts or doesn’t grow.
As far as the finviz, those are the three big ones as far as the descriptive tab, which is the first screen that pops up. The next one that I will go to is the fundamental tab, and this is where you’ll see all of the different valuations, financial metrics, ratios. The stuff that we covered in the previous episode that we did the complete valuation guide, which has been one of our most popular episodes.
For good reason because we packed as much info into that as we could. That is something that can supplement this episode if you are lost when it comes to the different metrics and ratios.
From here it is pretty self-explanatory, you can do it for the price to earnings, price to sales, price to book, price to cash, these are all things we have talked about.
I tend to go P/E under 25, as an example, P/S under 3 and P/B under 3, and price to cash under 10.
But what Dave said earlier is probably the most important point and what you should, if you forget about everything else we talk about here. Remember this one important point is that a screen should be fluid, it should not be this strict set of stringent rules that a stock can not break.
Depending on where the market is and where prices are going, you’re going to have the opportunity to have maybe 20 or 30 stocks that show up on our screen, but sometimes it may be just five. It depends, and these things will change every day.
But what is important to understand is that I am never going to buy a stock with a P/E under 25, or a price to sales under 3, or a market cap of 1.99 Billion. You can and should be fluid, and I do this a lot, and probably should do it some more.
When you run out of ideas, loosen up a metric or two. Instead of a P/E under 25, maybe check a P/E under 35, or price to sales under 4. A lot of times when I do not see opportunities, because finviz doesn’t give an under 20, or under 30. I just do any sometimes, and I will get price to cash around 100, but a lot of times that I will get stocks that might have slipped through my screens before when I was going price to cash of 10.
They may have had a price to cash of 12, or maybe 16. Something that was still reasonable and would still give a good overall valuation picture. But it just slipped through the cracks, because a screen by definition is cutting off the stocks that don’t meet the strict criteria.
Let the screener do its job, but you do the job as the DIY investor and use some intuition. Don’t be afraid to loosen up the screens to find differences and its going to give you a variety of ideas, more of a variety of investment strategy.
This is my opinion, and other people might not agree with this. In my opinion, you don’t always want to maximize for one metric like you don’t want to be the investor that is always going to buy a P/E under 10. P/E under 10 and focus on that.
I like to have a couple of stocks that have a great P/E, maybe a couple of those have a great p/b. Maybe a couple of those have close to no debt; I like to have a well-rounded portfolio in that way.
Because if you get your portfolio, maybe one sided towards a certain strength and that could deteriorate quickly. It might oversaturate you into different industries that tend to have lower P/Es, and I don’t think you are getting a fair broad exposure to the kind of returns that you can expect. Maybe they are comparable to the general market but give you at least that same kind of profit potential.
The big ones for finviz are going to be under this fundamental tab; you’ll have all the price based metrics. They also have a debt to equity; I do that as an under 1, maybe a small little detail is a way that finviz calculates debt to equity is different than the way that I do it.
Make sure you remember that a screener is just a great tool, and you should do the calculations yourself once you are looking at evaluating a company.
A screener is a tool to help you get a list of companies that is more digestible and one that you can systematically go through without spending tow or three days on it.
If I do some of these more general P/E, P/C, I am getting around 46 companies, and that was just with P/E under 25, P/S under 3, P/B under 3.
If I tighten it up to P/S and P/B under two, down to 28 companies. As you change these criteria, you’ll see the list expand or shrink.
One big one that I like to use, particularly with finviz. I am scrolling through the list and what tends to happen is you’ll get a ton of financial stocks, bank stocks, insurance stocks and those again because of the way I calculate debt to equity is different. Those I tend to stay away from because they highly leverage their balance sheets. Not to say they are terrible companies, but that is just the way that they run their businesses.
And I know there are different ways you can value or analyze that, but I just look at that particular sector as outside of my circle of competence. So I almost completely ignore them almost unilaterally.
One way that number one it is a good practice to do anyway. It is not part of my seven steps or my value trap indicator, but it is a good metric to use. And number two it takes away a lot of these financial companies that don’t have as much liquidity.
And that’s the current ratio; it takes current assets divided by current liabilities and like to go over 1.5 or 2. If I do an over 1.5 now, I am down to a more reasonable list of nine companies.
I see lots of stocks that I have looked at in the past. I see a couple of stocks that are in my portfolio now. This is just some of the power you can have with a screen, and it’s nice, and I run them at least once a month, and Dave you run them once a week. So I am sure you see these same companies over and over again. But it reminds you of the fact that many of these companies will stay undervalued for a very long time.
You don’t have to be the person that bought the stock when it was at the very bottom of the barrel. You can be somebody who bought when the stock was just treading water or maybe started an uptick. A lot of times these can take several years, maybe even three or four years before they trade up to their real intrinsic value.
It’s interesting just to run the screens and to see that’s a trend that I’ve seen. And I see it through many months where I am starting to see the same stocks. I can’t tell you if I’ve seen one out of this group of nine, that was there three years ago. A lot of these fluctuate in and out of the screen, and it can signal some great opportunities.
Dave: The point that you made about the stocks staying in that undervalued area for a while. I will give you an example, just recently I guess it was about a year and a half ago, the oil industry got beaten up pretty bad because the price of oil fell quite dramatically over a five or six month period. It fell from about $100 a barrel to under $40 a barrel.
Quite a few of the oil companies and auxiliary of the Chevrons and Exxons, they got beaten up pretty bad, so for a while when you would do your screens you would see quite a few oil companies in there. One of the things that I did was to buy into one of those companies.
But what I did was sit on for a while because I was seeing the price of oil continuing to fall and that was such an important commodity for this company. I wanted to wait until the company bottomed out, or at least I felt it was at a low point and likely wouldn’t go much lower.
At that point, I felt like it would stabilize or maybe bounce back a little bit. Before I started trying to get invested in the company, and not worry so much about getting invested into it now because it was so cheap. I was able to wait almost seven months before I bought the company.
I did my research, I followed all my steps, I have a checklist that I go through, read the 10ks, 10qs, and I looked at all kinds of different valuation metrics such as discounted cash flows. I did as much background works as I could so I was prepared when I felt like the company was going to be such that I would be willing to make the purchase on it.
And I did, it hasn’t skyrocketed, but it’s done ok since then. I understand that oil is a commodity and that there is a glut of oil in the world and the price is bouncing around a little bit right now. But I am patient, and I know that at some point it will go back up, and the company will be doing better then, and the price will rise as well.
And in the meantime, I am collecting dividends on the company, so I am still making the investment. Has it doubled in price since I bought it, No? And not every stock that you buy is going to do that, I would hazard a guess that some of the stocks in Andrew’s portfolio have, and some of them have done fantastically well.
But some of them are probably doing good, and that is ok because you can’t have every stock you own hitting it out of the park.
When you have a portfolio of 25 to 50 stocks you are going to have some that are going to do better than others, it is just natural for that to happen.
When things are not going well, and the company is still doing well or keeping its head above water, that’s a sign that management knows their stuff. If management can adapt to severe economic conditions, maybe not in the country or world, maybe just in that sector. If they are still able to hang in there during that time.
When things start to turn around and get better, then the company is going to excel. That is something to keep in mind as well as you are going through your investigations of any company.
Checking out how different companies did through the last recession that we had is a good way to evaluate management because that was about as bad a situation as you are ever going to have.
Another thing about doing these screens that Andrew and I are talking about tonight. I mention this many times on my blog, and I will mention it here on the air. Never, ever buy a stock based on just doing this one simple screen.
You come up with these nine companies that Andrew is looking at tonight and think, sweet I have nine companies that I can go out and buy, and you run out and buy them. Don’t do that, please. This is a starting point to give you ideas of companies that you might want to invest in.
This is not for you to take these nine ideas I want to buy, it is strictly the start of your research to find out if indeed they would be great investments for you. Chances are right now that this screen is showing six or seven of those stocks are in the banking/financial services and that is not something that you want to do.
This is just one tool that you can use to gather ideas, Andrew and I will probably talk about other ways to find investment ideas in the future. How to find investment ideas as we go forward, we just wanted to talk a little bit about how we screen for companies. We have touched on this in the past, but Andrew thought it would be a really good idea for us to go through the steps of actually screening for a stock.