With so many companies to research out there how does one go about finding potential value stocks? Value investors tend to read a lot; Francis Chou has even been quoted as saying he reads upwards of 200 pages (newspapers, magazines, books, etc) every day. On top of daily reading it's important to have a resource to go to when you are fresh out of ideas and need that next company to take a deep dive into. This is where stock screeners are useful.
The best stock screener I have found to date is ADVFN. It is completely free and can screen US, Canadian and UK equities. Also, it has more fundamental criteria available than I've seen anywhere else. If there are any other screeners you are aware of I'd be grateful if you posted them in the comments for the readers, although I challenge you to find one better than ADVFN.
Following are some of my favourite criteria to screen for as well as the constraints I like to place on each:
Gross Margin: I like a gross margin of at least 20%, this ensures that the company has the ability to alter pricing in order to push through competition and difficult times. Inventory/Sales: Industry specific, but you don't want the inventory turns to be too low, especially if you are placing a significant value on tangible assets - the longer the inventory sits for, the more uncertain its value will be. Net Cash from Continuing Operations: While GAAP earnings may be negative, these companies can still possibly be cash flow positive. I would be wary of any business that does not show positive cash from operations as they will just be eating into their cash asset and you can't predict for how long. Current Ratio: Must be greater than 1 otherwise the company does not have the ability to meet its current obligations. In a market like this where funding is increasingly difficult to raise this is a situation companies should be trying to avoid. Price to Earnings Ratio: I like P/E to be less than the long-term market average of 15. This is a good indication that the company may be undervalued, but the specific industry also needs to be considered. Price to Book Ratio: I keep this under 2, depending on what I am searching for, just to screen out those companies that are most likely overvalued. There are companies that warrant a premium price/book but these companies will also have a high return on capital, so you will tailor your screen to look specifically for those. Price to Tangible Book Ratio: Interesting companies can be found if this criteria is set to less than 1. These will also most likely be companies in distress however so they should be approached with caution. Return on Invested Capital: You can set this to be below your estimate of average cost of capital to find those with turnaround potential. Another option is to set this variable greater than your estimate of average cost of capital and combine it with a screen for companies with low Price to Book in order to find companies that are likely trading below fair value. Long Term Debt to Total Capital: I set this to a max of 60% and then I evaluate based on the specific company I find. Some industries, those with steady cash flows, can safely service high levels of debt. Then there are those with more variable cash flows that should keep debt to a minimum. Over 60% however is likely getting close to the upper limit of safety for any company. Sector: If you want to incorporate a top down view into your investments then screening by sector can be a rewarding way to significantly narrow the options. Institutional/Insider Holdings: I usually don't set restrictions for these variables but I do like having them available so that I can get an idea of share ownership. For example, when looking for stocks with turnaround potential I would be hesitant to invest in a company with low institutional and insider holding as no one has an incentive to get the job done.The above criteria are not always used concurrently. If they were, many times you won't find any companies appearing on the list. Part of the fun of a stock screener is to experiment, play around and see what you find. Different combinations of the above criteria among others, and their individual constraints, will yield different results.
I hope this is helpful in your search for value. As always, I welcome your thoughts and comments and I encourage you to share your own criteria for screening.
Jonathan Goldberg, MBA