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From 8000+ to less than 100- stocks in seconds

April 16, 2024
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There is thousands of stocks to research which makes the task seems daunting. Where do you start and how do you start?

A nifty approach to follow in order to reduce the number of potential stocks to investigate is called 'screening'. The idea is to eliminate stocks based on certain criteria e.g. profitability, growth and quality.

Below I will show show you how to potentially use a screener on finviz.

If you visit https://finviz.com/screener.ashx you will notice data for more than 8400+ stocks.

My first step to reduce the number of stocks is to only consider stocks with a market cap of $300 million+. I am not considering stocks below this threshold given their riskiness. 

1. $300 million +

The number of stocks decreases to 3800+ and we have already reduced the number of stocks by more than 50%.

Next, I only want to look at companies that are profitable and reasonably valued. In this exercise, I restrict the P/E to below 50 which still allows more richly valued companies to enter the screener.

2. P/E < 50

The number of stocks decreases from 3800+ to 2300+.

I also restrict the universe of stocks to those that are expected to remain profitable for the foreseeable future. This is achieved by setting the forward P/E > 0.

3. Forward P/E > 0

The number of stocks decrease from 2300+ to 1900+.

4. P/Free Cash Flow < 50

We also want to look at companies that generate cash. Unlike the P/E ratio which displays accounting profit, the free cash flow metric will give us an indication whether the company is actually generating cash from its activities.

The number of stocks decrease from 1900+ to 1100+.

5. Positive EPS next year

Not only do we want to look at profitable companies, but we want to look at companies that is expected to grow profits over the next year.

The number of stocks decrease from 1100+ to ~750.

6. Gross Margin > 30%

Gross margin can be an indication of pricing power, a higher margin is generally more favourable. 

The number of stocks decrease from ~750 to ~410.

7. Debt/Equity < 100%

We don't want to own companies with a lot of leverage. We want companies that generate cash to spend it on dividends, buybacks, acquisitions and reinvestment not debt repayments.

The number of stocks decrease from ~410 to ~250.

8. Return on Capital > 20%

The final criteria is a quality criteria. Return on capital indicates the company's ability to generate profit with its existing capital structure. With this restriction we are left with 60 high quality companies to investigate. 

As you can see, one can quickly whittle down thousands of stocks to under a 100 and be left with quality companies to investigate. 
 


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