Lesson 322018-11-01T08:27:02+00:00

BUFFETTS BOOKS ACADEMY: ADVANCED COURSE

LESSON 32: HOW TO USE A STOCK SCREENER

LESSON 31
COURSE OUTLINE
LESSON 33

LESSON SUMMARY

In this lesson, we learn how to use a stock screener. There is a variety of stock screeners on the market, but a great advantage with Google’s stock screener is that it is completely free. All stock screeners have one common purpose. Given the quantitative input criteria the investor puts in, the output will be the companies that meet those criteria.

Stock screener provides a large number of different key ratios that all can be found useful depending on the investor and his investment strategy. In this lesson, BuffettsBooks.com is setting the criteria based on the following key ratios:

  • Market Cap
  • P/E Ratio
  • Dividend Yield
  • P/B Ratio
  • Total Debt/Equity
  • Current Ratio
  • Return on Equity (5 Year Average)
  • Return on Equity (Most Recent Quarter)

It is really important to emphasize that there is no right or wrong criterion to use. For instance, Warren Buffett likes a P/E ratio below 15, but if you have a strategy where you would accept a P/E that is 20, it is completely fine. Also, in this lesson, we learn that the selected criteria depend on the general state of the economy. For example, in a very high stock market you need to loosen up on your criteria to find investment prospects, while a stock market crash would allow you to be very picky in your criteria for stock selection.

In the end, a stock screener is nothing more than a tool that gives you an indication of potential bargains. To figure out if it is a stock worth investing in, a comprehensive qualitative study must always be conducted as well.

NEW VOCABULARY

Total Debt/Equity
This key ratio is much related to Debt/Equity, but this key ratio is more conservative. It does not only include the debt that you can find on the balance sheet, typically interest bearing, but it includes all liabilities.

LESSON TRANSCRIPT

Before anything else, you need to refer to the video as you read this, so you can completely understand the lesson.

The Stock Screener is very basic and easy to use. I recommend Google Stock Screener over any other stock screeners out there. Go to Google and type Google Stock Screener and hit enter. It should come up as the very first item.

The purpose of this is to change the criteria. On the top most is the market cap. The number you see is the size of the equity of the business. As you slide the part to the left or right, you’re charging the criteria of companies that fit into those specific criteria.

You can add more criteria and narrow down the type of companies you are looking for, based on the financial terms and ratios. Anything over about 100M of market cap is a stable company. However, 100M though is still considered a small market cap company.

A good company has a price to earnings ratio below 15. What’s good about the Google Stock Screener is that it shows the average of all the different companies and how many fit at those current ratios. Put 15 as the criteria.

A PE ratio of 0 or below is bad, because it typically means that the the earnings are negative. You need to avoid that. Put in 4 or 5 in the PE ratio. It actually depends on how you want it, but I prefer 4, so I’ll type it in.

The dividend yield is 0. As you can see, we’re already down to 887 picks that pass the criteria we’re looking for. On the dividend yield of the current market condition, about 7% is realistic.

Back in 2008 and 2009 when the market crash occurred, I had this dividend yield cleared up to 12% to 14%. I had it high, because all the prices were low as the stocks were often so low! Remember, the dividend yield is the dividend rate divided by market price. Since the market price was so low, I was expecting a higher dividend, and the company to not sustain the dividend payments. Back then, I got really great picks with incredibly sustainable yields.

Now, based off of where the market is at, you’ll be lucky to find anything close to 7% and sustainable. Tick it on the boxes to see. On the low end, put in a 2% dividend yield. Just with that, it narrowed the company down to 457 companies.

You can add more criteria. Click “add criteria.” There are many different criteria to choose from. For example, you can choose the price to book. The price to book shows the margin of safety. We are trying to find a price to book below 1.5, so we will put 1.5 for the top criteria and .6 for the bottom criteria. If a company is trading for a price to look lower than .6, it’s probably not a good pick.

Click the price tab and look for the next criteria. I’m not clicking the EPS because I’ve already filtered that with the PE Ratio. Remember, the PE ratio is the price divided by earnings. You can either have a company that doesn’t have a lot of shares, so the EPS is high; or a company that does not have a lot of shares, so the EPS can be lower. However, you can’t relatively measure it. If a company has an EPS of 5, it might be as valuable as a company with an EPS of 1. That’s why I don’t care about the EPS. I’d rather use the PE ratio, because I’m comparing it to the price. The other things in the criteria are not really interesting.

There are some more different dividend metrics to put in. The dividend yield in percent is there.

The financial ratio is one that I like. I look at the total debt compared to the equity for the most recent water. Click on that. For the total debt to equity for the most recent quarter, I’m putting anything under 1.0. When figuring out the debt to equity ratio before, we weren’t using the total debt. We were using just long-term and some other different metrics. There’s a bunch of different ways used to measure debt to equity, but I’m using the total debt to the equity. The max is a little higher than the .5. Put 1.0. If it goes down to 0, that’s wonderful because it means there is no debt.

The other metric I like here is the current ratio. Click that. For the current ratio, if you remember, 1 means as many current assets as the liabilities. We’re looking for something over 1.5 in this number. Anything more than that is great. It means more money flowing in. Put that criterion of 1.5.

Now, there are only 12 companies left that meet the specifications.

If in the case, you have 0 stocks showing up. You need to go back to the start of the other criteria and adjust. As the market continues to improve and the market starts to climb, people are valuing a lot of stocks maybe a lot higher than they’re worth. You’ll have a larger spread to get something that’s within the zone you’re looking for. If you’re experiencing a major crash, these criteria will be tighter.

Go to the next tab, Operating Metrics. Return on equity is measured here. Return on equity 5 year average is good, because it shows a company that’s consistently being able to reinvest their money for a long period of time. Anything above 5% is good, but I’ll put in 7%. Now we’re down to 6 companies. I’m putting in the return on equity for the most recent quarter. Put it at 7% also.

The list shows 6 different symbols to look up. You can click on whatever company you like to learn more. I will never ever invest in a company that’s just toeing some symbols off of a stock screener. This is a tool that’ll get you to estimate and also helps you to learn where to start looking since it provides some really useful information. I hope this was informative. There are other metrics that you can play around with. Remember, it depends on you on how you want to develop your own specifications and strategies. What we just did now is my strategy. You can make your own.