Finding high-quality stocks to invest in can be a daunting task given that there are tens of thousands of publicly listed companies on stock markets around the world. With the help of a stock screener, this task can be made much easier. Investors can efficiently scan through a large number of stocks based on particular standards using a stock screener, making it a valuable tool for them. In this post, we'll show you how to use a stock screener to find high-quality growth and value stocks.
Before we dive into the criteria, it is important to understand what we mean by a value stock. Value stocks are typically found in relatively mature/large companies that have solid fundamentals, such as a strong balance sheet, slow but consistent earnings growth, and are undervalued by the market. This means that a value stock is cheap based on valuation ratios such as the PE or the PB ratios.
There are numerous free and paid screeners available online. Some popular ones include Yahoo Finance, Finviz, and Morningstar. Yahoo Finance is free and powerful.
Once you have chosen a stock screener, you need to set your criteria. This means deciding what factors you want to use to screen for value stocks. Here are the factors to select to find high-quality value stocks:
a. Choose region: There are value stocks on markets around the world so you can select the regions you prefer. However, you should always include the United States, considering the size of its public markets.
b. Choose market cap: Value stocks are typically larger companies so choose Mid Caps, Large Caps, and Mega Caps, while avoiding Small Caps.
c. Choose sectors: It’s preferable to choose sectors you are familiar with so you can easily analyze a company’s financials and make sense of its business model. Traditionally, there are some value-oriented sectors, including Utilities, Energy, Basic Materials, Healthcare and Industrials but you can find value stocks in other industries as well.
d. Choose financial metrics: The main characteristic of value stocks is that they’re cheap. So, using the stock screener’s filter, select stocks with a P/E ratio of less than 15. Also, value stocks need to have slow but positive earnings growth, so add the following filter: 1 Year of % Change In Net Income of between 1-10%. Finally, value companies typically pay a dividend. When the dividend yield is high, it may show that the stock is too cheap. So, add a final filter of Forward Dividend Yield % of greater than 4%.
After setting up your standards, the next step is to search for value stocks. The stock screener will generate a catalog of stocks that match your criteria.
While financials are important, there are other factors to consider when choosing a value stock. Look at the company’s industry, management team, and growth prospects. Is the company in a growing industry? Does it have a strong management team? What are its growth prospects? These are qualitative metrics that a stock screener can’t help with.
Investing in high-quality growth stocks can be a great way to build long-term wealth. But with thousands of stocks available, it can be difficult to find the right ones to invest in. Before we dive into the criteria, it is important to understand what we mean by a growth stock. A growth stock is one that is predicted to rise faster than the entire market due to the company's quicker-than-average growth rate. These stocks rarely pay dividends as they reinvest all of their profits to grow and are relatively expensive based on traditional valuation measures.
Once you have chosen a stock screener, preferably Yahoo Finance, you need to set your criteria. The criteria for finding high-quality growth stocks are much different than when screening for high-quality value stocks. Here are the factors to select to find high-quality growth stocks.
a. Choose region: There are growth stocks on markets around the world. However, make sure you include the United States, as it is the region where the vast majority of growth stocks are listed in.
b. Choose market cap: Growth stocks are typically small and midsized businesses so choose Small and Mid Cap companies.
c. Choose sectors: Choosing the right sectors is vital for finding high-quality growth stocks. You need to include sectors with strong growth prospects such as Technology. Other industries such as Energy include companies with strong growth prospects such as renewable energy and companies with poor growth prospects such as Oil & Gas exploration.
d. Choose financial metrics: The main characteristic of a growth stock is revenue growth. High-growth companies increase their annual sales by at least 20% so add to the filter this requirement. Also, high-growth stocks typically trade at premium valuations. And because they are often unprofitable, we use the Price/Sales ratio instead of the Price/Earnings ratio. So, screen stocks with a Price/Sales ratio of greater than 6. In the case of growth stocks, a cheap valuation multiple is not necessarily a good thing. It may be a sign of fundamental troubles that make the stock unattractive to investors and as a result, cheap. Next, you need to focus on the quality side of a company. This means that a growth company must be able to balance growth with cash generation, otherwise it is a speculative growth company. So, add to the filter: ‘1 yr. % Change in Cash from Operations greater than 10%.’ This is because you want your growth company to generate positive cash flows and increase them over time. Finally, you need to focus on the unit economics side of the business, which is often represented by the gross profit margin. Screen for companies with a gross profit margin of greater than 40%. Such companies include high-margin software firms, or sellers of premium products and services who have pricing power. You can further limit the list by adding more filters such as debt levels, ESG scores and others. But adding too many filers may filter out stocks that can generate significant shareholder returns.
Value stocks are typically mature companies with systems in place that allow them to run almost by themselves. But in the case of growth stocks, management teams play a crucial role in the company’s future. Look for companies with experienced management teams that have a track record of success or shareholder value creation. Finally, analyze a company’s competitive advantage as this will determine its future growth.
Using a stock screener to find high-quality stocks can be a powerful tool for investors. By setting specific criteria and analyzing the results, you can identify companies that meet your criteria and build a diversified portfolio that can help you achieve your long-term investment goals.
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