Stock Screening Parameters?

[JonathanJohnson 10]

First of all, I am a beginner and any help would be much appreciated.

 

I am wanting some practice managing a portfolio so I am creating a paper one and was wanting some advice on the screening process.

 

My idea is to use the Russel 1000 as the base index and to pick stocks from there.

 

The process I have in mind consists of importing information from Bloomberg into Excel and screening the information from there.

 

Things I'd like to know:

 

i) Is this a sound way of doing the screening process, or are there much simpler ways I am unaware of?

 

ii) I am looking to find stocks that have high growth potential, innovative companies with money invested into their R&D, good business models, and companies that have the potential for either buying another company or being bought by another company. Considering the above, what sorts of things should I screen for?

 

Much appreciated,

 

Jonathan Johnson

[Nick1984 10]

Hi Jonathan,

 

when screening for stocks you really need to know what you have in mind. A stock screener that comes in any charting program is a great way to get you started by screening the quantitative elements of a stock.

 

Generally your filters should reflect the strategy you're looking for. You mention growth. Growth is a function of EPS. You therefore need filters that include EPS, ROA, ROE (ROA is a component of ROE), NPAT, Operational cash flow, as well as basic liquidity and market cap criteria.

 

Eg, you may want stocks that have the following characteristics:

 

- MktCap > 50m

- AvgWklyTurnover >2m

- EPS growth yoy > 10%

- ROE > 12%

NPAT growth yoy for last 5 years

Operational Cash Flow > NPAT

 

You can tailor your list to suit your own criteria. That being said a list like that may return a lot of stocks so play around with it until you find what you're after. Also when designing a portfolio you want to make sure that you understand the dynamics of how stocks correlate to each other inside your portfolio. How does the inclusion or deletion of a stock effect your VaR, your Sharpe Ratio etc?

 

How do you allocate cash to a particular stock in a portfolio?

 

These are all questions that need to be answered and will depend solely on you.

 

Once you have your list of stocks you should delve into their financial reports and pick through them to find if you like what management has to say and look at the qualitative elements of the stock. Look at brokers reports if that helps as well.

 

Check out charts and if you have two companies that fundamentally are similar it may come down to a purely technical selection process that differentiates your selections.

 

Hope that helps.

[JonathanJohnson 10]

Thank you that helps, and definitely narrows down some of the choices. I'll be doing some further research into each of those criteria you said were good to look at too.

 

Also, I have been hearing/reading some things about different types of screens such as fundamental, technical, and quality. I think I have a pretty good understanding of the fundamental and technical screens, but I don't know much about the quality screening.

 

Is what you said above about looking at the financial statements and management's notes about the company what it means to do a quality screen? And if not, what is a quality screen, and what does it look for that is different from a fundamental and technical screen.

 

Thanks,

 

Jonathan Johnson

[JonathanJohnson 10]

It's been almost a month since this has been posted and since I tested the parameters. I have seen some positive results for my first go around. Here are the parameters and the results I've gotten:

 

I used the Finviz.com screener and portfolio tester.

I created a portfolio of 40 stocks on Nov. 18.

Since the 18th I have seen a 7.32% growth in my portfolio compared to roughly a 3.5% growth in the Dow, a ~5.2% growth in the S&P 500, and a ~6.5% growth in the Nasdaq.

 

With further research I'm pretty sure I could have narrowed down some of the losing stocks (there were only 4), primarily with EGHT, but hindsight is always 20/20.

 

Here were the parameters I had set:

1. Mkt cap > 50ml

2. EPS growth next 5 years > 10%

3. ROE > 15%

4. PEG > 1

5. Current Ratio> 1.5

6. Price above SMA20

7. Beta > 1.5

 

I'll be tweaking this more and posting new results.

 

Any ideas would be appreciated.

Edited December 11, 2010 by JonathanJohnson

[MadMarketScientist 11]

Great data and thanks for taking the time to coming back and following up on your research.

 

Hopefully you'll get some more tips/advice on your screen here but appreciate you taking the time to come back in and update us.

 

MMS

 

(One thing that might be interesting in your screen is to tweak it and add something that would also look for a stock that is undervalued relative to PE or growth so you could have it as a value priced screen as well perhaps)

[Nick1984 10]

MMS that would depend on what strategy he is trying to follow. The parameters he has used there look like they are focused towards a growth strategy.

I don't know whether having a Beta filter is worthwhile as this can change very quickly.

 

Jonathan, is your portfolio paper only? I would also question the need for holding 40 stocks. That is a very large number and you would want to have a fairly detailed attribution analysis to determine what is driving your returns.

 

I have traded on a $100M+ portfolio before and holding that many stocks even on a portfolio that size is not really that good because on a weighted basis you don't get enough bang for your buck.

[MadMarketScientist 11]

Good point on the number of stocks - that could be fairly challenging especially for an individual trading account -- commission costs, etc... plus a lot to track...

 

MMS

[rslamba 10]

In general, you want to be able to capture the core performance of the company measured against a value metric (Enterprise or Equity). Metrics like Market cap, past CAGR growth, P/E, ROIC, Institutional holding etc. may be used in varying sequences to get to a range of about 8-10 stocks. This article discusses stock screening parameters in great detail.

Stock Selection Techniques - Using a Stock Screening Model.pdf