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Wednesday, April 20, 2011

How to Screen for Stocks

When I was in graduate school pursuing a doctorate in Economics (actually achieved ABD - "all but done" or "all but dissertation" status), I had no question about what I would take as an elective. I took the highest level investment course offered in the business school. This put me as the only economist among a room full of budding MBAs - a bit intimidating, at least for the first 5 minutes, until my fellow students opened their mouths and started to talk.

The professor gave a quiz at the beginning of every class, typically comprised of 2 very basic questions. Apparently aspiring MBAs need a motivation to do the assigned reading.

At one class, the question was "What is a screen?" The class clown answered that it is a device that is used in the summer to keep flies out - amusing to everybody except for the professor. This was the exact same guy who announced before class one day that he had finished the semester paper that accounted for 50% of the grade. This was a week after it was assigned and 6 weeks before it was due. Do I have to tell you that he got a "D"?

Hopefully none of you got him as a broker. And, if by chance he is reading this, it is his opportunity to finally to learn what a screen is.

For our purpose, we'll use the New York Times screen. To me, screens are basically a way to test theories. You have an idea on how to find undervalued stocks (which you hope the market will recognize as undervalued in due time!) on the basis of some criteria. Maybe you haven't heard, but there was a guy one time who claimed he was great at picking undervalued stocks. The problem, he said, was that the market never recognized that they were undervalued!

Anyways.......start with the categories as follows.

Source: New York Times
For this basic example, first select "Fundamentals."  The criteria ranges from "Market Capitalization" to "Number of Employees."  Pick market cap. There the range is from""micro cap" to "large ca." Pick "small cap."  At the bottom of the column, you see that there are 1,968 small cap companies in the data base. Click "add criteria."

Next, go back to the criteria and click "Financial ratios."  Now you see 5 criteria. Select the ever-popular price/earnings (TTM). TTM stands for trailing 12 months and refers here to earnings. Range selections go from "lowest" to "highest."  Pick "low."

At this point, we've gone through the data base and picked out small cap, low P/E stocks. The screen has found 245 names that fit these criteria, as you can see if you click "view 245 results."  Here is the partial list:

Source: New York Times
CLICK TO ENLARGE As you can see, the list is alphabetical, with industry listed (valuable for diversification purposes) along with screening criteria.

Obviously, this can get pretty sophisticated because you have at your finger tips a lot of data and combinations you can sift through. Most financial sites offer a screen app so that you can easily pick the one you like once you get the hang of it.

If screening isn't your thing, then buy some index funds, patch the screen on the front porch, open a cool one and kick back.


  1. Nice HOWTO post Robert! I mostly use Google Finance - I need to give this a try. Looks intriguing!

  2. @MoneyCone Thanks. And I have to try Google Finance!

  3. I think the class clown gave you a pretty good answer on stock screening :-).... it's meant to keep the flies out of your portfolio. Any fool can do screening, evaluating the intangibles is the hard part..... like quality and honesty of management, are the books cooked, where's the marketplace heading for their products, and they leaders or followers..... then you have to worry about if the stock is at a bargain price or not.

  4. @The Grouch I agree that it doesn't take much to do a screen but a lot of investors seem to find it a useful starting point. I know some investors for example who won't look at a stock if its P/E is greater than 14.