When I initially first started looking into the stock market about 7 years ago, I didn’t know the first thing about what to look for when trying to find a company to research with due diligence. Most investment books at your local bookstore typically advise the reader to find a company that he is familiar with or one at which he actually shops and invest in that. Apparently this myth has been around long enough for people to believe it, but from my experience, it is the companies and the products that you don’t know about that will help make you wealthy.
One way to identify stocks is with an approach known as “Stock Screening,” which is a technique that finds stocks that match specific criterion. Initially, the investor starts with a pool of all stocks and begins to exclude portions of them by specifying different criteria, leaving only the stocks that match the set criteria for the investor to research further.
When it comes to a stock screener candidate for further research, I like to use Yahoo! Finance because it is free and is the main resource that I have used throughout my years of investing. To access the Yahoo! Finance stock screener please visit: http://screener.finance.yahoo.com/newscreener.html. Once there, click on Launch Yahoo! Finance Stock Screener, which will launch the JavaScript version. (If your computer does not open this screener, you can use the Launch HTML Screener and follow the similar instructions below.)
I will use the initial criteria of the Indiana University of Pennsylvania Student Managed Investment Portfolio team as a guide for this instruction.
The requirements of stocks in the portfolio have the following criteria:
- Market Capitalization of greater than $250 million
- Stock Price greater than $10 per share
- Price to Earnings Ratio between 5 and 20
- PEG Ratio between .25 and 1.5
Just using the above criteria, the stock screener has narrowed down the universe of stocks to 561 companies. Adding more criteria, such as “stocks that pay a dividend of 1% per year” and “stocks with a Price to Sale ratio of less than 2” brings the universe of stocks to a more manageable 146 companies.
Now that the screener program has helped to create a list of companies that, from the onset, appear to be trading at a reasonable valuation, it is time to pick a couple of different companies and perform further research. The next logical step in researching a company would be to complete the Comparable Ratio Valuation, which values a company based on the value of its competitors.
Using a stock screener such as the one available through Yahoo! Finance is quite beneficial to the novice investor because it identifies companies that may have never appeared on his radar. This process is the first step in how I found many of my winning stocks; also, the analysts on the IUP SMIP use this same approach to identify companies for further research.
If you have any questions, please feel free to email me at bryan@thefinancialwhiz.com or feel free to leave a comment.
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