Most investors know about stock screeners, yet avoid using them when they invest for the long-term. Let’s talk about how to screen stocks for investing.
Oftentimes their first instinct is to read third-party research on sites like SeekingAlpha and MotleyFool and invest in stocks without doing due diligence.
Reading research reports is a great way to get other people’s opinions on a stock. But that shouldn’t be your starting point. Learning how to screen stocks is essential to developing conviction in stocks for yourself.
A primer on how to screen stocks for investing
As soon as you begin reading other people’s views on a stock, your view has already been biased. It’s hard to develop contrarian views if your stock idea is based on other’s research. Learning how to screen stocks properly is a great start to doing your own research.
More importantly, screening for stocks lets you find the stocks tailor-fit to your portfolio.
For example, if you are heavy on large-cap tech stocks in your portfolio, screening for small-cap regional bank stocks would provide you with more diversification.
Learning how to screen stocks properly is a great start to doing your own research.
How to screen stocks #1: the professional way
Even professional money managers begin their careers by first learning how to screen for stocks for investing the proper way. They do it with more sophisticated filters, but the process is largely the same.
Fund managers also do much more intense due diligence after screening for stocks.
They would attend investment conferences a few times each quarter to meet with company management and develop industry relationships.
They also read industry reports and talk to industry veterans to do channel checks in order to gain insights into a company’s customers, suppliers, and competitors.
How to screen stocks #2: the best stock screener to use
There are so many tools to screen stocks, and they all look the same on the surface. Today we’ll go over the best stock screener available for free, and the step-by-step process on which metrics to filter by.
The professional investment industry uses mainly 3 services: Bloomberg, CapitalIQ, and FactSet. Bloomberg is the most common service but also costs the most. A Bloomberg terminal costs $20,000 a year, while CapitalIQ and FactSet cost about $5,000 per person per year.
If you don’t have access to those, there are many free stock screeners that have 80% of the functions as the paid services. The common ones are CNBC, Yahoo! Finance, and Fidelity.
But the best free screener to use is FinViz. It’s the fastest free screener with the most comprehensive feature set. You can screen using a wide variety of fundamental, technical, and descriptive metrics.
Now let’s take a look at FinViz and the metrics you can filter by.
How to screen stocks #3: the FinViz Stock Screener
There are a lot of metrics you can screen to drill down to your shortlist of stock ideas. Generally, filters fall into 3 buckets:
Descriptive metrics describe the type of companies you are looking for. Common descriptors are market capitalization, industry, and trading liquidity.
Fundamental filters set the company’s financial performance and valuation. Valuation metrics are based on multiples rather than discounted cash flow. Common valuation multiples include P/E, PEG, P/S, P/B, and P/FCF.
Technical metrics select stocks based on their historical trading patterns. They are more commonly used by growth investors. Common metrics include relative strength and moving averages.
How to screen stocks #4: a complete walkthrough
Let’s say that we have a favorable view towards the U.S. residential real estate sector. Residential housing prices are still reasonable, and both new residential constructions and mortgage rates are still low.
So let’s set the following industry metrics:
- Country: U.S.
- Sector: Industrial Goods
- Industry: Residential Construction
The result is a list of 22 stocks in U.S. residential construction:
Now, let’s say that we want to find a small-to-mid-cap stock to balance our large-cap portfolio. Let’s add the following metrics:
- Market Cap: Mid (Under $10 billion)
- Average Volume: Over 300k
How to screen stocks #5: valuation & company management
If you are a value-oriented investor, you’d want to learn how to screen stocks that are under-valued.
At the same time, you are conscious about the quality of management. You want to invest in a company that’s well-run and generates good returns on capital. Getting some dividend would also be nice. Let’s set the following:
- P/E: 5%
- Dividend Yield: >0%
To manage your daily risk, you want a stock that doesn’t have high volatility. We’ll also specify the historical beta:
- Beta: <1.5
Metric by metric, we’ve funneled 22 stocks to a shortlist of 2: Lennar Corp and PulteGroup.
After we use our stock screener, the next step is to do deeper fundamental research on Lennar and PulteGroup. You would compare their business model, key drivers, competitive positioning, and growth trajectory. Ideally, you would also build DCF models to produce an intrinsic price target. These are the next steps of putting together a sound investment idea.
Institutional money managers have customized stock screeners process they’ve built and refined over time. But the tutorial we just went through is in essence how investment analysts find stock ideas using a screen.
How to screen stocks #6: what not to filter
Not every screen metric is important. Here are some tips on what not to do when finding stock pitch ideas.
Don’t screen stocks by their analyst recommendations and price targets. You’d want to develop your own unbiased, objective views and arrive at your own conclusions.
Don’t use pre-built screens. Think about the metrics you want to use and think why they are important to you.
For example, if you are a growth investor, then most pre-built online screeners might not be a good fit. Most of them are built to find value stocks.
Define your own investment style, and filter by your own metrics to source investment ideas.
You’d want to develop your own unbiased, objective views and arrive at your own conclusions.
How to screen stocks: avoid using stock screeners too often
Stock screeners are great tools. However, using them too often can lead to FOMO – the fear of missing out. There might be hundreds of attractive stocks for you to filter and buy, but you can’t own them all.
Using a stock screener too much can help lead you to become a day-trader. You’d be inclined to sell yesterday’s stock for the new hot idea.
Pick a few good stocks and stick with them.
How to screen stocks #7: screener alternatives
If you are not a fan of FinViz, there are a number of other good options available. Here is a quick summary of the most popular stock screeners out there.
Yahoo Finance is the most popular free stock screener on the market. Especially now that Google Finance has decided to pull back on its features, Yahoo Finance is the go-to stock screener for individual investors to find stock news and analysis. It has fewer filters than FinViz but offers most commonly-used filters including sales & EPS growth and valuation ratios to screen by.
The Motley Fool’s stock screener is known for its own filter, the CAPS rating for stocks. CAPS ranges from one to five and provides a quick way for investors to find quality stocks. This comes at a cost. The Motley Fool’s stock screener has fewer filters than FinViz or Yahoo Finance’s stock screeners.
FinViz’s stock screen can be overwhelming to newcomers. It presents all the filters available at once.
On the other hand, MarketWatch’s stock screener can guide you through its filters one-by-one. This is a more user-friendly way to use a stock screener. However, the downside is having fewer advanced filters to play with.
Paststat is the close cousin to FinViz. It also offers a clean interface and fast loading times.
The key difference between Paststat and Finviz is the catered audience. Paststat is focused on technical filters, including relative strength and momentum. These are great for short-term traders. Investors prefer FinViz.
StockFetcher is a more overwhelming version of PastStat. It also caters to traders, but has a less user-friendly design and required medium-to-advanced knowledge of technical trading.
Do you have any questions about how to screen for stocks? Leave any questions below!