Stock Screening Strategies and Perils - A Comprehensive Guide
Learn the principles and strategies of stock screening, including technical, fundamental screens, and the perils to watch out for. Discover how to rank and choose stocks based on multiples, market cap, and momentum. Understand the risks and pitfalls of relying solely on screening tools for investment decisions.
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Presentation Transcript
Stock Screening basics Principle no 1: Identify a multiple on which to screen stocks Principle no 2: Rank stocks based on that multiple, from highest to lowest Principle no 3: Buy stocks with the lowest multiple and short stocks with the highest multiple
Technical Screens Small-stock screens Buy stocks with lower market cap; sell stocks with higher market cap. Neglected-stock screens Sell glamour stocks; buy value stocks. Momentum screens - assumes that momentum will continue. Buy rising stocks; sell losing stocks. Here the screener Contrarian screens - Buy losing stocks; sell rising stocks. Here the screener believes in mean reversion. Go with the seasonal stocks; give importance to the insider-trader.
Fundamental Screens P/E screens Buy stocks with low P/E ; sell stocks with higher P/E. P/BV screens Buy stocks with low P/BV ; sell stocks with higher P/BV. P/CFO screens Buy stocks with low P/CFO ; sell stocks with higher P/CFO. P/d screens Buy stocks with low P/d ; sell stocks with higher P/d. Be careful with low P/S stocks; higher sales growth does not necessarily ensure higher margin.
Perils of screening Basic danger with stock screening revolves around depending on a single-piece of information. Other than this fundamental risk, there are some other perils of stock screening. Stocks with lower relative ratio can still be overvalued; stocks with higher relative ratio can still be undervalued. Stock screening may work not because of screening efficiency but because of taking excessive implicit risk. Stock screening should be industry adjusted. It may churn profit; but it may take huge time.
