Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Screening ====== Screening is the financial equivalent of panning for gold. It’s a method used by investors to filter the entire universe of thousands of publicly traded companies down to a small, manageable list of potential investment candidates. Think of it as setting up a net with specific-sized holes; you're trying to catch the fish you want while letting all the others swim by. This process is typically done using an online tool called a stock screener, which allows you to set specific criteria based on metrics you care about. For a [[value investing]] practitioner, this isn't about chasing hot trends. Instead, screening is the first, crucial step in a disciplined search for wonderful companies trading at fair prices. It’s how you systematically sift through the market noise to find potential bargains that warrant a closer look and deeper [[due diligence]]. ===== The Screening Process in a Nutshell ===== The beauty of screening lies in its simplicity. It’s a powerful way to impose order on a chaotic market. The process generally involves three steps: - Define Your Criteria: First, you decide what makes a "good" company in your eyes. Are you looking for cheap stocks, financially strong companies, or profitable businesses? You translate these qualities into specific, quantifiable metrics. - Use a Tool: Next, you plug these criteria into a stock screening tool. Many online financial portals (like Yahoo! Finance or Finviz) and most [[brokerage]] platforms offer free and powerful screeners. - Analyze the Results: The screener will instantly generate a list of companies that meet all your specified conditions. This is your list of potential ideas, ready for the next stage of research. ===== Common Screening Criteria for Value Investors ===== While you can screen for almost anything, value investors tend to focus on criteria that point to financially sound, undervalued businesses. Here are some of the classics: ==== Valuation Ratios ==== These metrics help you gauge whether a stock is cheap or expensive relative to its earnings, assets, or sales. The goal is to find stocks trading for less than their intrinsic worth. * **[[Price-to-Earnings Ratio (P/E)]]**: A low P/E ratio (e.g., under 15) can suggest the market is undervaluing the company's earnings. * **[[Price-to-Book Ratio (P/B)]]**: Compares a company's market price to its [[book value]]. A P/B ratio below 1.5, or even better, below 1, was a classic hunting ground for [[Benjamin Graham]]. * **[[Price-to-Sales Ratio (P/S)]]**: Useful for companies that are temporarily unprofitable or in cyclical industries. A low P/S can signal an undervalued stock relative to its revenue generation. * **[[Dividend Yield]]**: For income-focused investors, this screen identifies companies that pay a relatively high [[dividend]] compared to their stock price. A consistently high yield can also be a sign of an unloved, and therefore potentially undervalued, stock. ==== Financial Health ==== A cheap company loaded with debt is a trap, not a bargain. These metrics help you find businesses that are built to last. * **[[Debt-to-Equity Ratio]]**: This shows how much debt a company uses to finance its assets relative to its equity. A low ratio (e.g., under 0.5) is generally preferred, as it indicates a stronger balance sheet. * **[[Current Ratio]]**: Calculated as current assets / current liabilities, this measures a company's ability to pay its short-term bills. A ratio above 1.5 or 2 suggests good liquidity. ==== Profitability and Quality ==== A cheap, stable company is good, but a cheap, stable, and //profitable// company is even better. These metrics help identify quality businesses. * **[[Return on Equity (ROE)]]**: This measures how effectively [[management]] is using shareholder money to generate profits. A consistent ROE above 15% often indicates a high-quality business with a potential [[economic moat]]. * **[[Net Profit Margin]]**: This reveals what percentage of revenue is left over as pure profit. High and stable profit margins are a sign of competitive strength. ===== The Art and Science of Screening ===== ==== The Peril of Being Too Picky ==== While it's tempting to set very strict criteria to find the "perfect" company, this can be counterproductive. Over-screening can filter out excellent opportunities. For example, a great company might be making a large, temporary investment that depresses its short-term earnings (giving it a high P/E) but sets it up for future dominance. Always be willing to investigate //why// a company fails a particular screen. Sometimes the story behind the numbers is more important than the numbers themselves. ==== Screening Is Just the Start ==== **Important:** A list of stocks from a screener is //not// a buy list. It's a list of ideas that require further homework. Screening tells you "what" but not "why." It can identify a company with a low P/E ratio, but it can't tell you if that's because the market is foolishly pessimistic or because the company is about to go bankrupt. After screening, your real work begins: reading annual reports, understanding the business model, evaluating the management team, and assessing the durability of its competitive advantages. Screening finds the rocks; due diligence is about looking under them.