Imagine a haystack that is at least 20 feet high and twice as wide in circumference and there are 9,000 needles hidden in there. 25 of them could be more valuable than the others than the others but at first glance they all pretty much look the same. Trying to search through the haystack for those special needles is definitively a formidable task that could take quite a long time. But what if there was a way to sort through all the hay and needles in minutes to find those particular 25? Now that would be worth looking into.
So it is with stocks. The U.S. Stock Exchanges have over 9,000 stocks between them, so how do you find the ones that may help you to buy that summer home on the beach? Sure, you can go with the most well known stocks; the ones that all the institutional brokerages buy; that’s easy. In fact, some of them should probably be in your diversified portfolio. Although sticking with the big, well-known names may be safer, that leaves thousands of other companies you haven’t heard of; some of which may be the next Apple (AAPL) or Microsoft (MSFT). In other words, golden opportunities are lost in that giant haystack that is almost impossible to sort through…unless you use a stock screener.
A stock screener is a powerful tool that can help you sort through the “hay” in order to find the potentially valuable “needles.” While stock screeners are not foolproof and provide no guarantee that the companies are hot commodities, they are an excellent way to examine specific numeric data that can help you identify potential opportunities. They will find in seconds what could take you hours, days or weeks to do.
The search criteria can screen for data such as market capitalization, industry type, revenue, EPS, ROE, P/E ratio, share price, volume and more. From there, you will be provided with a list of companies to further analyze from a variety of perspectives, such as company news, industry, analyst opinions and charts, before you invest your money.
If you enter “stock screeners” into a search engine, you find everything from the very basic for free to the very advanced that requires a fee. Although the fee-based screeners offer more in depth data that will help you to better identify the type of investment that works for your portfolio, it’s best to try out the free ones first for a test run.
What should you look for in a stock screener?
- The data should be up to date. If it isn’t based on recent information, it simply isn’t worth using. Believe it or not, that is an issue for some of them.
- It should have the ability to sort and save your search results. Sounds simple enough but not all of them do.
- The better screeners incorporate certain technical analysis criteria. These are definitely the more sophisticated screeners and are worth finding, especially if you use technical analysis for your investment decisions.
- Historical comparison is definitely a feature that can be very helpful in your stock analysis. Being able to historically compare your results by criteria such as benchmarks by sector or industry is very important.
Yahoo Finance has one of the best free screeners. They also have bond and fund screeners as well as other invaluable tools for uncovering potential investments that warrant consideration. CNBC has a good stock screener for beginners. Others include FinViz, Morningstar, MarketWatch, Google Finance, Wall Street Journal and Zack’s. They each have their pros and cons, but they provide a good variety of free screener options to choose from.
If you get to the point where you find the free screeners helpful but want something far more advanced, then it’s time to check out the fee-based screeners. In addition to detailed company information, the more advanced stock screeners will also provide you more features and functionalities such as a ranking system for your stock results based on the criteria you plugged in. Many even have the ability to import the results on to an Excel spreadsheet to save for your easy reference. You’ll find some good ones on Morningstar, Portfolio123, Stock Investor Pro and Stock Screen 123 (this one is considered the gold standard in many ways).
Another attractive feature on the fee-based stock screeners is the “back testing” feature. If that is a new term for you, as an investor, then it’s time to embrace the concept. Back testing is a way to review the historical data of a stock and then reconstruct your investments by using that historical information as an investment strategy. In other words, let’s say you like to buy a stock after it appears to bottom out and begins a major reversal into an uptrend, then sell at the stop, wait for it to go back down and do the same again. In other words, you essentially engage in market timing. Does that strategy work better than buy and hold on a particularly volatile stock, for instance? This feature will help you to find out.
With back testing, you plug in your buy and sell criteria for a set block of time that you specify. The application runs the numbers for you by whichever strategies you test. It’s quite interesting to see the difference in dollar amounts from an historical perspective. What’s even more important is that it allows you to refine your strategy going forward. You can play out the various investing scenarios to see the results you would have achieved. Does your strategy beat the market or underperform? The results can surprise you. Hopefully, you become a more successful investor as a result.
The really good screeners also give you statistical analysis of your strategies including profit/loss, volatility, ratios, returns and more. But it should also be said that back testing has its flaws so it’s important to understand that past performance is no guarantee of future results. The value of your results also depend on whether you have chosen a long enough period of time and whether you are comparing stocks only in one sector or to a broader selection across several sectors. Still, historical data and analysis does allow you to refine your strategies to one degree or another, which is the whole point of back testing. To try a simple back testing application, visit www.Zacks.com, www.MarketInOut.com or www.Stockbacktest.com.
So, thanks to technology, it may not be as difficult as you may think to find those 25 needles in that haystack. It still took some work and careful searching, but companies you never would have looked for, heard of or found on your own could suddenly become a part of your portfolio…and are doing well.
What does this mean to you? Smart investing takes time. Unless you are an investor with lots of time on your hands, any available tool to help you find and research new investment opportunities puts you a step closer to your investment goals. Using a screener to weed out the underperforming companies and zero in on the top producers in various industries or even those who have the potential to reach the top, is certainly a way to optimize the time you spend making investment choices. It’s an easy way to present you with new investing options and then let you back test your strategies to become a smarter and more successful investor overall.