Financial Freedom SG

We saw how to acquire the basic investment knowledge in Part 1 yesterday. Now, we look at how you can use online stock brokerages to help you screen stocks to look at.

Step 3

Stock Screening

I use POEMS to help me look at a more manageable list of companies to look at.

Using the Data Tools, there is a useful little program "Search Stocks" which can help you to sift out the different criteria that you use to whittle down the many companies to the several that are worth looking further into.

The criteria I look for are:

• Market Capitalisation
  • 600 to 50,00 million
• ROE (Return on Equity)
  • 11 to 100
• ROA (Return on Asset)
  • 1 to 100
• Price to Tangible Book
  • 0.5 to 12
• Dividend Yield %
  • 11 to 100%

When you key in the limits to these criteria, this nifty program will generate all the companies that fits what you are looking for.

As to why I used those numbers, market cap is because of my own opinion that bigger companies are safer and less likely to fail, witness the saving of banks too big to fail recently. Return on equity is key to high prices or dividend so this is a key indicator to see if a company is doing well.

Return on asset is basically how the management is making use of their asset to generate returns, so it shows how good the management of the company is. Price to tangible book is another important indicator to judge if you are paying too much and also if the stock is not being fairly valued, so a minimum number below 1.

Dividend yield is what the company is paying back to you the investor so you can use this for further investment or buy stuff with.

From hundreds of companies, at one click, it reduces them all to the type of numbers- 41, that you are looking for. (In case you are doing it at the same time and gotten 42, the reason why it is 41 is because one stock appeared twice in the table, the other is just the same stock except that you can buy in lots of 10 shares.)

Now that it is a manageable list of 41 stocks for you to look at we can move on.

Step 4

Using this chart, you can copy the whole table to your Excel sheet for saving and storing, so that you can remember these are the stocks that you are keeping track of. Remember to select around the same number of rows and columns in Excel (it doesn't have to be exact) and use "paste special" command and select "unicode text". 

Next, I'd sort according to the price to tangible book to see which are the stocks which are not fully priced. The reason for it could be that the market has yet to fully price what this company does, or there could be some short term bad news hanging around it. However, it can be the company has structural problems that you may discover from a careful reading of their financial statements.

This is a lot to digest. So on Saturday (I don't normally blog on Fridays as I am normally out) we will look at how to do Internet scuttlebutt work to kick more companies out from the list. It will narrow the list to a more manageable number to consider for buying.

Next up, balance sheets and cash flow statements.

Other posts in this series:

1. How to Select a Stock to Keep? Part 3 of 3

2. How to Select a Stock to Keep? Part 1 of 3