Wednesday, November 21, 2012
Screening Software to Pick Winning Stocks
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I use stock screeners every day.
I cannot imagine investing in stocks without the assistance of a screener.
There are over 10,000 stocks out there and you need a quick and reliable way to sort through them all.
It's not enough to type familiar ticker symbols into a website and do a spot check on whatever items happen to be displayed.
For one, most people's universe of familiar stocks is relatively small. And that alone will limit one's investment opportunities. And two, even if your universe of familiar stocks is larger than most, nobody's is big enough to stay abreast of them all.
Nor would you want to. Many stocks should not even be considered as investments. So you don't want to clutter your mind with those tickers.
But many others are worthy of consideration, and you need a way to get those onto your radar screen.
This is important. Many investors are not seeing the kinds of returns they want in their portfolios because their universe of familiar stocks is limited.
What's interesting is that some of your best performing stocks right now were likely new to you at some point.
But there are plenty of others that could also be top performers for you if you only knew about them.
And the best way to discover new, potentially profitable stocks is to regularly scan for the best opportunities.
Some people avoid screeners because they think it's complicated, or they don't think they know enough about stocks to look for the right things.
But you don't have to be an analyst to benefit from a screener.
For example, if you're interested in finding some new stocks for your portfolio, just ask yourself some simple questions.
Such as: Do I want stocks that will see both sales growth and earnings growth next year?
If so, plug those into the screener.
Now, only those with your desired growth rates will appear on your list. And those with negative sales growth or negative earnings growth will NOT be on that list, so you don't have to waste your time on them.
Would you prefer your stocks to have low debt levels or high debt levels?
(If you're thinking about traits you'd like your stocks to have, I'm assuming you said low debt levels.) And if that's the case, plug that into your screener as well.
Now, only stocks with your desired growth rates AND low debt will come through.
Would you want your stock to post a positive surprise or negative surprise?
If you're bullish, you probably said positive surprise.
There's no foolproof way to perfectly predict which stocks will positively surprise in the future. However, studies have shown that stocks that have surprised in the past have a tendency to surprise again in the future. So by screening for stocks that have recently posted positive surprises, you are increasing your chances that those stocks will positively surprise for you.
Just go down your wish list of characteristics you'd like your stocks to have.
Your criteria do not have to be fancy, and your screens do not have to be complex. Much of it is common sense. And the screener will help you sift through all of the garbage so you can spend your time on only those worth considering.
A good screener can also inspire you and introduce you to new ways to pick good stocks.
In the Research Wizard (the screener that I use daily), there are hundreds of different screening items to pick and choose from. (I can even create my own.)
And they are all organized in easy to understand categories like Growth, Valuations, Margins, etc.
But in addition to the most common and most popular screening items, there are other lesser known items available, but no less powerful.
A great example is the R-Squared Growth Rate item. I had seen that item in the screener over and over again. One day I decided to test it. I read the definition that came with it and decided to give it a try.
Long story short, I was amazed at its predictability. And I ended up creating a screen with that little known item. And I was so glad I did. Because that screen was actually UP in the bear market of 2008 while the market plunged nearly -40%!
They say when you play a sport with someone better than you, it raises your game. Or when you work with a talented person, you perform better. The same is true with the tools that you use.
By seeing what a tool is capable of, it allows you to think about what you could be capable of.
I never would have 'discovered' the R-Squared Growth Rate item (not to mention countless others) if those items hadn't been staring at me and made available in a tool that allowed me to test them.
A good stock screener can inspire you and help you pick better stocks on a consistent basis. And as traders and investors, that's what we all want.
Today's screen focuses on some of my current wish list items:
Top 50% of Zacks Ranked Industries
(The top half of Zacks Ranked Industries has outperformed the bottom half by a factor of more than 2 to 1.)
Zacks Rank equal to 1
(Over the last 26 years, the Zacks #1 Rank (Strong Buy) stocks have shown an average annual return of 26% a year.)
Positive Projected Sales and EPS Growth
(Simply put, I want my stocks to be growing on both the top and bottom lines.)
Positive Sales and EPS Surprises
(As mentioned earlier, stocks that have surprised in the past have a tendency to surprise again in the future. This increases our chances of getting into stocks that will positively surprise for us.)
(If margins are going up, that means management has a good grip on costs, which allows more of each sale to be counted as earnings.
Price to Sales Ratio less than or equal to 1
(In my testing I have found that stocks with a Price to Sales (P/S) ratio of less than 1, significantly outperforms stocks with a P/S ratio higher than that. (Over 4 demonstrated the worst average returns.)
There were 21 stocks that made it through this week's screen. Here are 5 of them:
CALM - Cal-Maine Foods
(Industry: Foods-Mics. Diversified, ranked 73 out of 265, or top 28% of Zacks Ranked Industries)
CVI - CVR Energy
(Industry: Oil Refining & Marketing, ranked 55 out of 265, or top 21% of Zacks Ranked Industries)
EEFT - Euronet Worldwide
(Industry: Financial-Misc. Services, ranked 41 out of 265, or top 15% of Zacks Ranked Industries)
LBY - Libbey
(Industry: Appliance-Household, ranked 1 out of 265, or top 1% of Zacks Ranked Industries)
THO - Thor Industries
(Industry: Building-Mobile Homes/Rec. Vehicles, ranked 41 out of 265, or top 15% of Zacks Ranked Industries)
All of these stocks meet every single one of my current wish list items, which means you can focus your time on only the top selections.
A good screener can help you save time, discover new stocks, consistently find winners and inspire you to become a better trader.
Be sure to get the rest of the stocks on this list. And make sure you sign up for a free trial to our powerful, yet easy to use, screening and backtesting program for your own stock picking inspiration.
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