This is an excerpt from the Liberated Stock Trader Book and accompanying Training Course. Chapter 5 – Introduction and Section 3 – Finding Defensive Stocks
Stock Screening – Finding the Needles in the Haystack.
Well you made it this far congratulations!
So far we have discussed the key attributes of attractive companies and how to interpret numerous factors to get an overall picture. It is always important to let a number of measures build the picture never rely on just one.
Now we will learn how to screen for stocks that could form your base list of stocks to review in detail. Here is the process I use to find winning stocks.
- Understand what you are looking for. For example (Fundamentals – EPS% Acceleration)
- Use your selection criteria to narrow down the 7000+ stocks on the US Stock Markets. (Stock Screening)
- From your Screened List you can then review in detail further fundamentals.
- Learn a little about the industry of the stocks you are interested in.
- Perform detailed Technical Analysis to assess when to buy; “Charting”
- Work out your Entry and Exit Strategy
- Wait for the right time and buy.
So this section is explicitly about filtering out the junk to find the gems. This is known in the industry as Screening for Stocks. Essentially filtering out stocks based on specific criteria. The problem at the moment is there are many Stock Screeners on the web today but many of them want you to pay or many of them do not allow you to select the relevant criteria preferring to give you options to select many measures but few offer “EPS % increase” as criteria.
The following criteria used in the following stock screen example can be used with the NASDAQ Stock Screener and with Telechart 2007. I use and recommend Telechart 2007 is it a premium Stock Technical Analysis Package that I have used for over 10 years and contains almost all of the features I require. It is especially powerful at screening and sorting on Technical Indicators and on Fundamentals. If a criteria used below is not available in either Telechart or the Nasdaq.com Screener I will specify this.
Although the NASDAQ exchange provides this screener the screener scan all stock on all US Exchanges which is an absolute must.
Finding the Slow Growers / Defensive Stocks
There may be times when you are feeling cautious and wish to switch your portfolio into more defensive stocks. This is what the Fund Managers do and so can you. In times when the Business Cycle is turning downwards, this might bring two advantages. With many people switching to defensive stocks you may also see a strong price move as well as reap the rewards of the dividend yield. The dividend is a payment made to the Shareholder as a reward for making the investment. Not as many companies distribute profits as dividend anymore but some still do.
The Dividend yield = Annual Dividend per Share / Price per Share.
So if a dividend of $1 is paid by 2 companies; Company A’s Share price being $10; Company B’s Share price being $20. Then company A would be a better choice as the Dividend Yield would be 10% as opposed to 5%.
The dividend is, of course, one of the primary factors for moving into defensive stocks but a dividend of 6% will be worthless if the stock price has deteriorated 15%. Anyway, let’s look at potential criteria to find the highest yielding stable stocks.
- Close Price >= $4 – this is the Share Price of the Stock at last market close. Use this to filter out Penny Stocks.
- Market Capitalization >= $200 Million. This is the worth of all the outstanding stocks added together. Essentially the worth of the company. You could use a higher number here is you wish depending on the size of the company you wish to see.
- EPS Basic => 0.01 We want to be sure the company we expect to pay us dividends is actually making a profit.
- P/E Ratio Min 2 & Max 100. Minimum of 2 Ensures the company is making a profit, 100 ensures the company is not ridiculously overpriced.
- Debt to equity max 0.80 or 80% Debt should be at most 80% of equity, some Utility Companies who are dogged dividend payers may be highly leveraged, this might be an industry norm and we would not want to discount them from further detailed analysis.
- Dividend Yield Min 5% If we are going to invest for dividends, 2% does not cut the mustard. 5% is more worthwhile.
This scan gives me a list of approximately 94 Companies paying a dividend of between 5% and 21%.
The chapter in the books shows you how to find fast-growing stocks and blue chips also.
Other Chapters of the Liberated Stock Trader Book are listed below
This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics
This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.
What are stock market cycles and the cycles of business and economies. Important information that you need to appreciate as part of your core analysis.
Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.
Stock screening means using criteria to short list the kind of stock that you want to purchase. A vital part of any stock market training
Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis helps with.
Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last. Vital for you to establish buy and sell signals.
Which indicators should you use, there are literally hundreds of stock chart indicators. Each have a specific use case and application, which should you use?
Volume is a vital indicator along with price. Both of these you need to understand in granular detail, you will learn everything you need to know.
Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.
How are the market participants feeling? Positive, Negative or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Lean how to use them to your advantage.
Understanding how you want to invest, how much time you have and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.