Using a Stock Screener to Identify Fundamental Value Stocks

Ravi had delved into many aspects of fundamental analysis, from understanding valuation metrics to assessing intrinsic value versus market price. Now, he faced a new, practical question: How could he use this knowledge to find investable stocks? Enter the stock screener—a powerful tool for filtering stocks that meet specific investment criteria.

What is a Stock Screener?

A stock screener is a tool that helps investors filter stocks based on criteria like the price-to-earnings (P/E) ratio, market capitalization, and dividend yield. Think of it as a search engine for stocks—enter your criteria, and the screener generates a list of companies that match your specifications.

Why Stock Screeners are Useful for Fundamental Analysis

Ravi realised that identifying value stocks involves analysing key financial metrics, profitability, and industry comparisons—tasks that are tedious and time-consuming without a stock screener. Stock screeners streamline the process, allowing investors to:

• Quickly filter stocks by valuation metrics.
• Customise criteria based on investment goals, such as targeting undervalued stocks.
• Access financial data and compare companies side by side.

Approach to Using a Stock Screener

Let’s walk through how Ravi set up a stock screener to find potential value stocks.

Step 1: Defining His Investment Criteria

Ravi selected these key metrics:

• P/E Ratio: Aiming for stocks with a P/E ratio below the industry average to find undervalued stocks, he set a P/E filter of less than 15.
• P/B Ratio: Looking for stocks trading below their book value, he set the P/B ratio to less than 1.5.
• D/E Ratio: To avoid heavily leveraged companies, he set the debt-to-equity ratio to less than 1.
• Dividend Yield: Interested in dividend-paying stocks, he set the dividend yield filter to over 3%.
• Market Capitalisation: To avoid very small companies, he filtered for companies with a market cap above $1 billion.

Step 2: Using the Stock Screener

Using an online stock screener, Ravi entered his criteria. Within moments, he had a list of stocks matching his filters, including companies in the technology, FMCG, and financial sectors. To diversify, he shortlisted companies from different industries.

Step 3: Further Analysis of the Shortlisted Companies

After screening, Ravi knew more in-depth analysis was necessary:

• Financial Health Check: He reviewed revenue growth, profit margins, and return on equity (ROE) over the past few years.
• Management Quality: Researching CEOs' backgrounds, he also looked for transparency in company disclosures.
• Industry Comparison: Ravi checked each company’s financial metrics against industry peers to confirm they were strong contenders.

Using a Stock Screener Effectively

Ravi discovered that to use a stock screener effectively, you should:

• Customise Filters to Fit Your Goals: Align filters with your personal investment philosophy, whether targeting growth or value stocks.
• Avoid Overfiltering: Too many filters can yield few or no results, so start broad and narrow down as needed.
• Acknowledge Limitations: Stock screeners provide an initial list but don't tell the whole story. An in-depth analysis is essential for understanding a company’s business model, risks, and growth potential.
• Update Criteria Regularly: Market conditions vary; adjust your filters to reflect whether the market is bullish or bearish.

Building a Diversified Portfolio

Ravi identified three companies that fit his criteria and diversified his portfolio:

• TechNova Ltd.: A tech company with a strong balance sheet and low debt. With a P/E ratio of 12, lower than its industry peers, TechNova showed undervaluation.
• GreenFoods Inc.: An FMCG company with steady revenue growth, a 4% dividend yield, and a solid market presence. Its P/B ratio of 1.2 was attractive to Ravi.
• SecureBank Ltd.: A mid-sized financial firm with a D/E ratio of 0.7 and consistent dividend payouts. Its 3.5% dividend yield met Ravi’s income criteria.

Conclusion

With the help of a stock screener, Ravi quickly identified value stocks that aligned with his investment goals, saving significant research time. Stock screeners act as powerful tools, enabling investors to focus on companies that match their criteria for deeper analysis.

As we conclude this module, remember that investing is a continuous learning journey. Stay informed about market trends, enhance your knowledge, and leverage tools like stock screeners to make well-informed decisions. The market may be unpredictable, but with the right knowledge and tools, you can approach it confidently.