In: Categories » Legal and finance » Stocks and mutual funds » Advanced Techniques for Building Stock Screens
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This section outlines several ways to set up stock screens that may be beneficial for your information mining. I offer a few examples of ways you can build stock screens to discover specific categories of stocks. I use the categories of growth stocks, income stocks, and value stocks for these examples. Screening for growth stocks Growth stocks expand at rates faster than their counterparts. They have different degrees of risk and are a way of betting on the future. Your stock screen for growth stocks may consider the following criteria: Basic growth: Any stocks that have an earnings growth of 15 percent or more in one year. Long-term growth: Any stocks that grew 15 percent or more in one year over the past five years. (Companies must have historical EPS records of over five years.) Earnings for growth: Stocks that have a price-to-earnings ratio that is equal to or less than the growth rate of the stock plus its dividend yield. Aggressive growth companies with low P/E ratios: Stocks with annual earnings growth of more than 24 percent and P/E ratios of less than 15. (P/E ratios of less than 15 are preferable, but rare in the current market.) Screening for income stocks Income stocks tend to be stodgy, boring, slow-growth companies that are steady income producers. You may want to include dividend yield in your stock screen for income stocks. For example, you may screen for any stocks with a dividend yield that’s at least equal to the S & P 500 and that never falls below 4 percent. (This criterion rules out growth stocks that don’t pay dividends.) Screening for value stocks Value stocks are companies that have strong financial statements and good earnings but are traded at stock prices that are less than their industry peers. Some criteria that you may want to include in your stock screen for value stocks include the following: Book value: Stocks for which the book value of the company is less than 80 percent of the average S & P 500 stock. Debt/equity ratio: Stocks for companies with a debt/equity ratio of 50 percent or less. P/E ratio: Stocks for which the average of the company’s five-year earnings is not less than 70 percent of the average P/E ratio of the S & P 500. Don’t include stocks with a P/E ratio greater than 12. (A low P/E ratio may indicate that the stock is selling at a bargain price.) Underpriced stocks: Three criteria exist for this section of the value stock screen: • Small cap stocks with quick ratios (current assets less inventory divided by current liabilities) greater than 1.0 and return on assets (ROA) greater than 0.0 • A price-to-earnings ratio (P/E ratio) that is half of that industry’s average • A price-to-book value ratio of 80 percent or less, and a price-tosales ratio of 33 percent or less
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