We'll be the first to admit that selecting good stocks isn't easy. The sheer volume of companies makes zeroing in on a good stock difficult, and the huge amount of data on the web doesn't make things any easier; it's hard to sort out the useful information from the worthless data. Fortunately, a stock screener can help you focus on the stocks that meet your standards and suit your strategy. Here we look at what a stock screener is and how it can work for you.
Stock Screening Basics
Stock screening is the process of searching for companies that meet certain financial criteria. A stock screener has three components: a database of companies, a set of variables and a screening engine that finds the companies that satisfy those variables and generates a list of matches.
Using a screener is quite easy. First you answer a series of questions such as the following:
- Do you like large-cap or small-cap stocks?
- Are you looking for stock prices at all-time highs, or companies with stocks that have fallen in price?
- What range for the price-to-earning (P/E) ratio is acceptable?
The good screeners will allow you to search using just about any metric or criterion you wish. When you finish inputting your answers, you get a list of stocks that meet your requirements.
By focusing on the measurable factors affecting a stock's price, stock screeners help their users perform quantitative analysis. In other words, screening focuses on tangible variables such as market capitalization, revenue, volatility and profit margins, as well as performance ratios such as the P/E ratio or debt-to-equity ratio. For obvious reasons, you cannot use a screener to search for a company that makes, say, "the best products."
Three of the best free screeners on the web include those offered by Yahoo! Finance, MSN Money and FinViz. All three have basic screeners and advanced screeners.
The basic screeners have a predetermined set of variables whose values you set as your criteria. For example, one of the variables on the FinViz basic screener filters stocks by market cap, giving you the option of finding companies that, for example, exceed or fall below $300 million in market capitalization.
Although there are some good free screeners out there, if you want the very latest and the very best technology you will likely have to break down and get a subscription to a screening service.
Example Screen on FinViz
To demonstrate how screeners work, let's look at an example using FinViz's free screener. Let's say we are looking for an apparel company that trades on the NYSE, has a P/E ratio under 25, has an EPS growth of over 10% over the last five years and a debt/equity ratio over 0.1. Before the age of computers, searching for companies to meet these criteria would have been a massive undertaking - it could have taken days. With a screener, it's easy.
Here is what the screener looks like on FinViz:
After we enter these criteria into the screener, it gives us the companies that make it through each of the filters of our search. (Note that these figures were correct at the time of the search, but are likely to change continually as stock prices fluctuate and new financials are reported.)
|Type Of Screen||Companies Remaining|
|Trading on the NYSE||23|
|P/E ratio under 25||17|
|EPS growth past 5 years over 10%||5|
|Debt/equity over 0.1||1|
Now that we have the results of the stock screen, we have one candidate worthy of further analysis - that is, if we are confident in our criteria and the values we choose for them. The company that the screener gives us are only as valuable as the searching criteria we enter. Also, it's important to remember that the screen is not the analysis itself. The screen can't guarantee that the company that made all our criteria is the best purchase, so we have to dig deeper to find out more.
The big challenge with using screens is knowing what criteria to search for. The hundreds of variables make the possibilities for different combinations nearly endless.
Screeners are extremely flexible, but if you don't know what you're looking for or why, they can't do much for you. To help investors, some sites have predefined stock screens, which have their variables already entered.
The following sites offer some of the better predefined screens (these are just a few examples of what's out there):
- Yahoo Finance - This site includes three predetermined screens: "Greatest Sales Revenue," "Largest Market Cap" and, most notable, "Strong Forecast Growth." The search criteria of each predetermined screen are clearly explained so you can understand the screens' underlying principles.
- MSN Money - Includes a 1 to 10 rating system, which filters out companies based on a "system of advanced mathematics" that "determine a stock's expected risk and return."
- FinViz - The screener includes a "signal" dropdown menu that filters such as "top gainers," "recent insider buying" and "wedges."
Things to Watch Out for When Using Stock Screeners
Although they are useful tools, stock screeners have some limitations. Here are some things you should keep in mind:
- Most stock screeners include only quantitative factors. There are still many qualitative factors to keep in mind: no screener provides information about things like pending lawsuits, labor problems or customer-satisfaction levels.
- Screeners use databases that update on different schedules. Always check how fresh the data is - if a screener's data isn't timely, your search could be meaningless.
- Watch for industry-specific blind spots. For example, if you are searching for low P/E valuations, don't expect very many tech companies to show up.
The Bottom Line
Remember, stock screeners are not the "magic pill" for selecting stocks. Nothing will ever replace good old-fashioned nose-to-the-grindstone research. However, screens can be a good place to start your research process as they can save time and narrow your options down to a more manageable group.
InvestingNeuroeconomics attempts to bridge neuroscience, cognitive psychology and economics in order to understand the mechanisms underlying economic decision making.
Investing BasicsAre you considering hiring a fee-only financial advisor or one who is compensated via commissions? Read this first.
InvestingAfter October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
InvestingWhile stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
RetirementWe discuss the advantages of seeking professional help when it comes to managing our retirement account.
ProfessionalsLearn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
Investing BasicsA diversified portfolio will protect you in a tough market. Get some solid tips here!
EntrepreneurshipThere are a lot of risks associated with running a business, but there are an equal number of ways to prepare for and manage them.
Active TradingIt's impossible to avoid disaster without trading rules - make sure you know how to devise them for yourself.
Mutual Funds & ETFsDiscover the top Vanguard target-date retirement funds with target dates in 2020, 2030 and 2050, and learn about the characteristics of these funds.
Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>
Financial advisors dislike target-date funds because these funds tend to charge high fees and have limited histories. It ... Read Full Answer >>
A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
Mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high ... Read Full Answer >>
Financial advisors who operate as fee-only planners charge a percentage, usually 1 to 2%, of a client's net assets. For a ... Read Full Answer >>