What is a stock screener? A stock screener is a tool that aids you in stock picking based upon some specific parameters, usually mere numbers, which you specify according to your risk tolerance. While Google Stock Screener and Yahoo Stock Screener seem to be the pertinent ones that prop up among a number of them if you do a web search for stock screener, for the Indian stock market, ICICI Direct Stock Screener has remained my favorite for more than a decade. However, when I turned into a value investor, it became apparent that none of them have the stock selection criteria that a value investor will look for! Then how can a value investor screen stocks? There is no other way than to manually screen the information available in the public domain with a few parameters specific to value investors. So what should be the criteria that a small value investor should look into while selecting stocks for his investment portfolio? Read below. (Update: I found out a good, free stock screener for Indian market. See below.)
Stock Screener for Value Investment Portfolio of a Small Investor
The company which you intend to buy shares:
- Should have zero debt or very minimal debt and should be cash rich.
- Should preferably be a large cap or at least a mid cap.
- Should have been in the business for at least two economic cycles. An economic cycle is usually considered to be approximately 10 years.
- Should have an excellent financial track record and should be profit making. Should have the net sales, net earnings, and book value per share increasing at the rate of more than 12% year on year.
- Should not be capital intensive and should be preferably in the service sector.
- Should have a promoter stake of at least 40%.
- Should have a price/earnings ratio less than or equal to 5.
Furthermore, the following conditions need to be met with before a value investor can buy a stock:
- The company should have a sustainable competitive advantage over its competitors and the products should have a brand value. The company being a monopoly in its business would be the best option a value investor can get.
- The management and the promoters should be trustworthy.
- The stock should be available with a margin of safety of at least 1/2 to 2/3 of its book value.
Note that I never mentioned about dividend payouts and rewarding the shareholders with bonuses etc., while choosing a stock. If your money is in the ideal hands of a trustworthy management, it will find its way compounding. You are better off with such companies than those that reward shareholders. So that isn’t a criteria at all while screening a stock.
The foremost thing that you need to remember is to preserve capital than to make money in the stock market. Hence, if your favorite stock or the stock that you zeroed in fails to satisfy any of the parameters mentioned above, the stock screener of a value investor, then don’t buy that stock. Let the money lie safe in your bank account or debt instruments until you find one such wonderful stock!
Update (February 19, 2012): In my pursuit for a good, free stock screener for Indian stock markets that could sieve through data of thousands of companies and return me results based on different variables and parameters that I prescribe, I stumbled upon Screener. On Screener, either you can search for stocks of companies by defining your own variables and parameters or people have already created filters based on standard parameters here. So it should be very much advantageous for you to have this site pick you some stocks at first than yourself manually going through a ton of numbers before zeroing in on any stock.
Update (September 15, 2014): Find below a list of few more stock screeners for Indian equity markets.
Enjoy. Happy investing.
I couldn’t find any stock complying all the above parameters; however, it seems I could confidently pick a couple if the market would collapse and when all say “There is blood in the markets.”