How to use a screener

I am often asked how I find and select my stocks. Sometimes I stumble upon them by chance. Most of the time, however, I use a screener. It allows me to search in bulk across the entire stock market, based on certain criteria.

There is a bit to drink and eat in terms of stock market screeners, some are free (Yahoo), others paid, some even very expensive. There are some that offer enormous possibilities, with endless indicators and backtest possibilities (portfolio123), while others are very sober and summary (Marketwatch Or CNBC). Sometimes we find mainly technical analysis variables there (stock monitor), sometimes rather for fundamental analysis (gurufocus), often both (finviz, MarketInOut, TradingView, Quant Investing Or Motley Fool). Finally, some focus on specific themes, such as dividends (dividendinvestor).

No need to pay for a stock screener

Generally, a simple and free screener covers the most important needs. After all, the goal is to find a certain number of stocks, which we will examine again later. A paid screener, a little more sophisticated, can save a little time, by offering better filtering possibilities. Sometimes it also allows you to come across stocks that would pass outside the radar of the more basic stock market screener.

However, there is no point in subscribing to an ultra-sophisticated screener. It is even counterproductive because not only does it represent a cost, but above all we lose sight of the essential, the analysis of the title itself. A stock market screener cannot replace your own judgment. On the other hand, being able to backtest is good, but scientists, like J. Siegel or J. O'Shaugnessy, have already done it for us. So there is no point in trying to reinvent the wheel. We will do it less well than them anyway.

Beware of covered markets

In fact, the biggest problem in choosing a stock market screener is the market it offers. Most of them are limited to the American market. So you quickly get stuck when you want to invest in Europe or around the world.

I have chosen here to present to you the screener of FT. It is free, easy to use and covers a good part of needs. It is not the Rolls Royce but it already allows you to find opportunities, at the international level. I find a lot of titles that I present to you here through this means. The drawback of FT is that for some time now, access to company data has been paid. When you have found your titles, you have to go to your usual platform to analyze them. For example, you can find information on Yahoo Finance or on the website of the company concerned. The other option is to pay for the FT subscription. You can also do everything from Yahoo, with their stock market screener, but I find the latter less good.

Using a screener in the stock market

For those who don't want to bother, there are already a number of predefined screeners. For example, there is one for "Warren Buffett" and another for "Ben Graham". That already sounds good. By clicking on "View" we access the results and the criteria of the screener. We can have fun going to see how it is built, which gives us a first idea of how the tool works. But the best thing is to start from a "blank page".

So let's see step by step how it works.

There are three distinct groups of criteria. First the countries, then the sectors of activity and finally the financial attributes themselves. We can already see on the right the 143,417 titles at our disposal. So there is a choice, which is important because the skimming will be done very quickly as soon as we apply certain fundamental filters.

Regions and countries

By expanding the "Country" menu, you can select by region (Europe, America, Africa and Asia/Pacific) or, more precisely, by country. If you don't choose anything, all the titles remain active. As soon as you click, you filter. For the test, we will limit ourselves to a few developed countries: Belgium, France, UK and Switzerland in Europe, USA and Canada in America, and Japan in Asia/Pacific, i.e. 7 countries in total. We "only" have 36,922 titles left. Note that if we had limited ourselves to the USA, we would have only 17,686. Hence the importance of having an international screener.

Sectors and industries

Let's move on to the types of activity. Here too we can make a macro choice, by sector, or more fine-grained, by industry. For the example we will focus on companies that are more defensive in nature, i.e. those that are most likely to ensure regular (and if possible increasing) payment of dividends. Here I have chosen the sectors of consumer goods and services, health, oil & gas, telecommunications and public services.

In industry, I simply clicked on "All...", but I could also go into a little more detail by removing for example "Automobile & Parts" in "Consumer Goods" or by adding "Aerospace & Defense" under "Industrials". We end up with 20 sectors, comprising a total of 14,768 titles. Of these, we only have 4,949 left since we previously filtered our search regions. If you do not want to choose a particular sector or industry, I advise you to select them all (with "All..."), rather than not filtering anything. If you do not do this, you will be polluted by titles appearing in duplicate.

The fundamental and technical criteria of a stock market screener

Now let's get down to business. By expanding the "Equity attributes" menu, you can access the fundamental and technical criteria. By default, there are already four displayed: Market Cap, Beta, Dividend Yield and Consensus Forecast. You can simply remove the last one, it is useless (unless you are contrarian and want to buy stocks recommended for sale by analysts).

Beta can also possibly be removed, unless you want to limit yourself to very defensive stocks (beta < 1), for example. But we have already done a bit of this work indirectly with the choice of sectors of activity. For me it is not a primary attribute, so I remove it. The same goes for capitalization (market cap). I prefer small and medium-sized companies, but this is mainly because they are in principle less expensive. So my primary criterion is valuation, not capitalization. So I also remove this criterion.

Dividend yield

Then there is the dividend yield. For me, the dividend must be interesting enough to make it worthwhile. So I enter "1" in the box on the left, which gives me a yield of at least 1%. I could also have put a maximum, knowing that yields that are too high are generally false friends. However, we will see later that there is a better method for this. There are 51,112 stocks that pay a dividend of at least this level, but with the criteria previously established, I already have only 2,136 stocks left.

A little tip in passing, it is possible for each criterion, rather than directly entering a numerical value in the field, to choose its interval from the distribution of titles (by clicking on the two opposite arrows on the right):

The rest of the panoply

Then, by clicking on "+ Add or change criteria"We finally access the rest of the range. There are 12 categories. Each time we click on one of them, one or more different criteria are displayed.

Let's leave aside the "Default" category, most of whose elements we have already discussed and which does not add much. The same goes for Stock Metrics. Only the "Institutional Percent Held" criterion could be interesting, if we are looking for stocks where institutions are very little present, for example. That being said, as long as we are looking for stocks that are not too highly valued, this will in principle be the case. Once again, this is a secondary criterion. There is no point in adding layers of filters that go in the same direction; we might as well focus on the primary criteria.

The current ratio

It starts to get interesting under "Balance Sheet", especially with the current ratio. I add it to my filters and I limit it to a minimum of 1.5, which gives me companies that have more current assets than current liabilities, with a safety margin. I therefore exclude companies that are experiencing difficulties, temporary or not, with their liquidity (and which would therefore risk a default).

There are 61,153 titles that match this criterion, but there are already only 880 left compared to our current selection! To keep more potential candidates, we could also have not taken a safety margin, by putting only "1", but in this case the analysis itself that follows requires that we be even more particularly vigilant and demanding.

Under Growth Rate, we can choose, for example, so-called growth stocks, which show good growth in their profits. We will come back to this a little later, with the "Growth" category which is somewhat in the same vein. So let's leave this theme aside for the moment.

Valuation ratios

Valuation Multiples. Here we go. The crux of the matter. You can find more information about these indicators here. We can choose from the famous PER, the Price to Book (MRQ = most recent quarter), the Price to Cash Flow (TTM = last 12 rolling months) and the price/sales ratio. Unfortunately, there is no FCF, but we can get a rough idea of it by going through the CF, obviously being more "severe" for the latter.

Here it is possible to focus on a single criterion and search for the cheapest stocks relative to it or to use them all at the same time, skimming the highest values for each of them.

Mixing the ratios of a stock market screener

For the example, let's follow this last approach here. So I entered limit values for each valuation ratio. The advantage of mixing is that it avoids some bad surprises (typically a company would trade very cheaply compared to sales but whose margin would be so low that it would make a miserable profit: in this case the PER would be very high). The disadvantage is that we potentially miss companies that are significantly undervalued compared to certain criteria (for example a large discount compared to assets, but with very little profit).

Now we have 184 titles that can still fit into the mold.

Now let's move on to the category "Management Effectiveness", which relates to the profitability of the company. Growth value investors will certainly be interested in this point (among others). That being said, research has never really been able to confirm the superiority of these criteria. So let's leave these elements aside. Same for the size of the company (Measures of Size), for the reasons already mentioned.

Momentum

Under "Price", we find the price variation over the last 52 weeks. Although it is a technical criterion, I sometimes use it to avoid falling on a falling knife. By using a minimum of -15%, I tolerate a small negative variation compared to a year ago, which can be justified by the normal volatility of a stock. On the other hand, I eliminate stocks in full collapse. Pure value investors consider this as heresy of course. However, it has served me better than it did me harm. It's up to you to decide... But there are already only 59 stocks left available!

As for margins, it is the same as for profitability. Research has not been able to prove the usefulness of this indicator. The same goes for growth. Historically speaking, growth stocks have performed less well than value stocks, even if for the past ten years the opposite has been happening, because of, or thanks to, a hyper-expansionist monetary policy by central banks. The longer this difference in favor of growth stocks persists, the more likely it is that in the future exactly the opposite will happen. We also leave aside the "Efficiency" category, which is of no use to us.

The distribution ratio

The last category, Financial Stength, is already more interesting to us. This is where we find the famous "Payout Ratio", which we will limit to 70. This allows us to focus on stocks whose dividend is well covered by profits. We note that this criterion does not change anything in our selection, since there are still 59 candidates. This is due to an indirect filtering effect of the previous indicators, in particular those of the Yield and the PER (Payout Ratio = Yield x PER). We can also use in this category the "total debt to capital". Personally, I prefer to control the debt in relation to the overall image of the company, during the analysis itself. I therefore limit myself here to entering an upper limit of 0.8 in order to filter only the extreme cases.

This brings us to 57 stocks that may interest us. As a reminder, we started with 143,417. With nine criteria, although left very broad, we have considerably reduced the selection.

Fine tuning with a stock screener

57 stocks is still a bit much before moving on to the analysis. We can therefore do some fine tuning with criteria deliberately left aside. I told you that growth stocks were not historically more efficient than value stocks. That being said, we could still want to avoid companies that have not managed to increase their profits over the last five years. This is simply done by choosing under "Growth":

Note that I put "1" instead of zero, because the screener strangely does not perform a filter if you put a zero value. "1" means that we are looking for companies whose earnings per share have increased by at least 1% per year on average over the last five years. This is not much to ask, but with this we still eliminate a fair number of stocks, since we only have 36 left. We could have done the same thing over the last ten years, but from experience this last filter eliminates a few too many companies, not for fundamental reasons, but simply due to a lack of data (and I am not necessarily talking about companies that did not exist more than five years ago).

Last skimming with a stock market screener

Before releasing our shortlist, we will still do a final skimming, being a little more "strict" on certain valuation criteria, just to take an additional safety margin. We could have done it earlier, but before starting you never know what you will end up with. That is why we started with fairly broad limit values (while avoiding expensive titles all the same).

Since we are in a dividend approach, I want the company to be cheap especially relative to the cash it generates (which can themselves be translated into distributions). I could also be more demanding in terms of yield, but this does not treat two companies that have different distribution policies fairly.

Estimate FCF from CF

Since the FT screener does not provide valuation data relative to FCF, I estimate it from CF. Relative to FCF I would have chosen a limit of 15 (like profit). In a first draft, I had set a price limit two times lower than CF, estimating that FCF represented half of the latter, because of capital expenditures. Now I take an additional safety margin by dividing it by three. I therefore end up at a limit of 5. I now have only 12 papal stocks left.

By clicking on "go", I get my list of titles (extract):

Quick check

From there, you have to get to work. Do a quick first check of each company. Is the stock trading regularly, with enough volume (to avoid exotic stocks that trade once every four Thursdays).

Are dividends growing (can't screen this on FT)? Did they have to be lowered/suspended? Do asset values also tend to increase, like cash reserves? Do cash flow and earnings increase regularly or do they line up losses/stagnations followed by incredible years? Are cash flow and earnings consistent over the long term or do they diverge? Does the currency of the stock correspond to the place where it is listed (to avoid Russian stocks listed in London for example)?

FT allows you to do these checks easily with the graphic view under Financial/Overview (but it is paid). Otherwise you have to go through Yahoo Finance under Financial, then choose Income Statement, Balance Sheet and Cash Flow. It is less obvious for a first quick sort.

Short list after using a stock market screener

When we have finished this quick manual sorting, there is a chance that we have divided the list of candidates by three or four. If the reduction is too great, we must become less greedy on the valuation (e.g. put 7.5 back for the CF limit value).

In the example here, I ultimately only retained the following three titles:

• JEL:LSE
• 8029:TYO
• 6042:TYO

No American title, no Swiss title, which is not surprising given the valuations of these markets. No European title either (if we take London out of Europe...). This shows that I may have been a little too greedy in terms of price (but it is better to be a little too greedy than not enough). On the other hand, Japan is definitely there, not surprising either.

Analysis

Then I move on to the analysis itself. JEL:LSE, despite a Piotroski score of 8, is eliminated fairly quickly because of a FCF problem over the last five years (even if that of the last financial year was good). Capital expenditures represent in fact 220% of the profit on average over the last financial years. Not great.

8029:TYO is doing a little better. The valuation ratios are all excellent, with even an EBITDA/EV at 46%. The dividend yield is good, with 2.78% well covered by earnings and FCF. The company's debt has fallen sharply over the last few years to the point that the shareholder return (dividend + share buyback + debt repayment) is 9.7% on average over the last five years! On the other hand, the momentum of the last six months is not very good, the Piotroski is at 4 and the stock is very volatile (40%). So do not put it in the hands of overly emotional investors.

The rare pearl

Last but not least, 6042:TYO, a very small Japanese company that goes by the sweet name of Nikki. Contrary to what one might believe, it is not active in the porn industry, but in the automotive equipment industry. Remember. We had not excluded this type of activity at the beginning of the process, because we had not gone into the details of each industry (the automobile is part of consumer goods). We were right to do so! Indeed, even if a priori this industry is sensitive to economic and financial upheavals, Nikki's beta is only 0.24 and its volatility is quite normal, with 17%.

When you are too restrictive upstream, you risk missing opportunities, as would have been the case here. The stock is very cheap, relative to all indicators. The dividend amounts to more than 4%, for a distribution ratio of only 30% relative to the average FCF (even less relative to earnings). Cash reserves are good, debt is low and decreasing. The stock should at least double to reflect its intrinsic value. Here we are, a nice little stock!

Using a screener in the stock market: conclusion

A stock market screener allows you to discover opportunities and save time. From more than 143,000 companies, we finally came across a single stock of interest. You understand why it is important to have access to the entire market. We could have found more by broadening certain search criteria, for example in terms of sectors of activity, countries or certain fundamental parameters. The broader we are at the beginning of the process, the more "manual" analysis it requires later. Conversely, the more restrictive we are upstream, the greater the chances of finding nothing. This is especially the case when the market is expensive as a whole. Which is sometimes not so bad...