Contents of this article
As a beginner looking for stock ideas to trade, the most common approach is to ASK AROUND: ask friends who invest which stocks they are “playing” right now, ask your broker, ask people you consider experts, or simply do something like this:
I have written a fairly detailed article on where to find stock trading ideas, and the most proactive and effective way is to build your own stock screener with suitable criteria. Going back to the example in the image above, you could answer that question yourself by creating a simple stock screener with the criterion P/E < 5x.
In this article, we will look at how to build an effective stock screener based on simple criteria. If any criterion is unclear, look for the related follow-up articles from Green Chart to understand it better.
The 3 elements of a good investment
Most stock screeners fail to find good investment opportunities because they focus only on certain groups of criteria and do not cover all the factors needed for a good stock. You will often see screeners that lean too heavily on technical analysis, focusing on spikes in price and trading volume (I bet most of the screeners you find in the market focus on these two factors), or on signals from technical indicators to pick out stocks with good buy points, while paying no attention to fundamentals, business performance or valuation. Some “value” investors I know, on the other hand, focus too much on how “cheap” a stock is, looking for stocks whose valuation ratios are considered low and attractive, such as P/E and P/B below the industry average; some stocks even trade at a fraction of their book value. However, these stocks usually fall into 1 of 2 categories: either the price is such a bargain that nobody sells – liquidity is too low to build a large position – or they are in a stage of decline or saturation with little chance of rising again.
In my personal experience, a good stock – a good investment – needs all 3 elements: reasonable value, growth potential and price trend. A stock may be attractively valued relative to its intrinsic value but lack the business growth needed to sustain and build on that valuation in future. Or even when both of those are confirmed, we still need to watch the price trend – to know when the market crowd also recognises it and acts. You don’t want your capital tied up for years in a stock that is “good but never goes up”, do you?
How to build screening criteria
Here is a truth I want to share: it is very hard to find a stock that meets all 3 criteria at the same time. So I usually screen stocks using the criteria whose data changes least often, then track the remaining criteria daily.
Clearly, of the 3 criteria above, 2 depend on and change daily with the stock’s market price: valuation and trend. It would take a lot of effort to run a screener on these criteria every day. Business growth, by contrast, is easier, because revenue, profit and efficiency figures in the financial statements are only published once a quarter, so you won’t need to repeat the work for another 3 months.
I usually screen for a list of stocks whose businesses have grown well over the past few quarters, then focus on tracking their price action to find entries in a clear trend, combined with an attractive valuation (usually based on P/E or P/B).
Here is one of my favourite growth screens for your reference. It is fairly simple and largely inspired by William O’Neil’s well-known CAN SLIM method:
- Revenue over the last 4 quarters up > 15% year on year.
- Profit after tax over the last 4 quarters up > 15% year on year.
- Cash flow from operating activities (CFO) over the last 4 quarters > 0.
- Gross margin > 15% or above the industry average.
- ROE > 12% or above the industry average.
Popular stock screening tools
One of the best free stock screeners I often use is the screener from Investing.com.
You can add further parameters as you wish, such as EPS growth, dividend yield or other financial ratios.
Once you have narrowed down the stocks that meet these criteria, carry out a more detailed qualitative assessment and follow their daily price action closely to choose suitable buy and sell points.
Happy trading!
The “Stock Trading For A Living” course
Green Chart designed this course to give students a solid foundation in fundamental analysis & stock valuation (Fundamental Analysis), and to show them how to integrate it effectively into their existing trading system, especially for traders who already use technical analysis (Technical Analysis). The program consists of 5 theory sessions and 6 months of hands-on guided trading in the live market with the lecturer.
See full details of the course here.
