Smart Military Investor’s Guide to Using a Stock Screener
There are over 46,000 companies in the world that are publicly traded in the stock market. If you have the time, perseverance and patience to start at number one and work your way down the list to find a good company to invest in, then go ahead. This post is not for you.
The rest of you, who are like me, need to find a way to find a good company among that vast group and still have time to binge watch episodes of Shark Tank.
Say no more. This guide will help you dwindle down that list of 46,000 to about 15 to 30 solid companies by using a stock screener.
What is a Stock Screener?
A stock screener is a tool for investors to filter stocks based on a certain set of criteria. After running a screen on a stock screener, there is a better chance that the companies remaining from the screen will be good investments based on the investor’s investment style.
There are so many different stock screeners to use. Here is my list of some free options. The best part is these screeners can be used with my guide:
Test out each of these. You can also find more across the internet. Once you get the basics of a screener you can use it to enter the criteria in this guide.
Smart Military Investor’s Basic Stock Screener Criteria
There are many kinds of ways to invest in the stock market. You can use technical indicators from stock charts or you can list some companies on the back of cards, stick them to a wall and throw darts. You know, whatever suits you.
But you are here, and there is no secret that Smart Military Investor is a fan of value investing. The type of investing the made Warren Buffet among one of the richest people alive. Value investing is the technique of finding undervalued companies that are also well managed.
To find these companies through a stock screener I use three basic criteria:
1. Return on Equity: This ratio can give us a clue to how profitable a company is. Equity is the money that is invested into a company. In this case, our money. Shareholder’s buy stock and provide a company money to complete daily operations. What we want to know is how much RETURN on that equity there is.
To find that we will take the company’s net income and divide it by the shareholder’s equity. Luckily, we don’t have to do that ourselves. That is what the screener is for.
So, on your screener input this:
ROE > 15%
This is ensuring us that the company we invest in uses the money it receives from us is used efficiently.
2. Debt-to-Equity ratio: I gave this ratio the nickname of “The Bank Loan” ratio. Mainly because if a company has too high of a Debt/equity ratio, then I won’t give them any more of my money.
The D/E ratio can let me know if the company is over-leveraged by debt. For example, if a company has $100,000 of liabilities and $50,000 of equity then there are $2 dollars of debt to every $1 dollar of equity. I don’t know about you feel about debt, but that is not good in my opinion.
To put this into personal finance terms, when you first get a car loan your D/E ratio is at its very worst because you have yet to make payments on the car. Basically, you have no equity in the car and the bank has leverage over you. Now, let’s say that you used Smart Military’s Ultimate Guide to Eliminating Debt and you have paid 75% of the car off. The bank has less leverage over you and your equity in the car is higher. So, what does that mean? If you decide to sell the car, most of the money will go to you and not the bank.
We want our companies to operate with not much leverage held over them. So, on your screener, input this:
Debt-to-Equity ratio < 0.5
3. Current Ratio: This ratio indicates the ability to how easily the company can pay off its short and long term debt. The current ratio is found by taking the current assets and dividing it by its current liabilities.
I use this ratio because I need a company that can survive hard times. If there is an economic downturn, I need to know the company will still push through it. Being able to handle the debts with the assets on hand is a good way to know that.
For example, if a company has a million dollars of assets and only has one hundred thousand dollars in debt, then I know the company wouldn’t have to make a single dollar more and they could pay off their debt ten times over.
Input this into your screener:
Current ratio > 2
Smart Military Investor’s Advanced Metrics
The three criteria above are pretty much all you need for a solid screen, however, there are some other metrics I use in screens to get an even more defined list.
First, I like to look at the market cap. This metric is used to determine how big a company is. There are small cap, mid cap and large cap companies.
Large Cap companies (market cap > $1B) are your big brand names. They offer slower growth, but can sometimes provide a steady stream of dividend payments. You will find your dividend aristocrats with this metric.
Small Cap companies (market cap <$500M) are you smaller unknown companies. These companies have a lot of risk involved because they are not as well established as the large cap companies. The pros of these companies are they can provide huge returns. Over the life of the stock market, small cap companies have provided the greatest returns. Just be careful to not put too much risk in your portfolio by investing in only small cap companies.
Mid cap companies ($500M < market cap < $1B) have some qualities of both small and large cap companies. Each company can vary.
The second metric I use is if the company pays dividends. About 75% of my own personal portfolio pays dividends. Hey, I like the guaranteed income stream. (dividend > 1%)
Hopefully you have gathered a list of 15-30 solid companies that would make a value investor get up and dance. What you want to do now is separate each company by the sectors. For example, retail companies with retail companies, oil companies with companies etc. You should compare each of the companies and find the best one in each sector.
Unfortunately, I ran out of time in this post, but there are many more steps you must do before you decide to put your money in a company like reading annual reports to find the companies goals and business risks. I also calculate the companies intrinsic value to make sure I am buying the stock at a decent price.