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Stock Screening Strategy

I track many quantitative strategies and screens in the search for undervalued stocks. But I'll focus on a few simple ones for large stocks here.

(The links on the left provide weekly results for the strategies described below. There is also a FAQ, for the detail oriented, at the bottom of the page.)


Simple Large Stock Screens

High Dividend Yield

The high dividend yield approach, when applied to stocks in a large cap index, is one of the most popular screens. It simply looks for stocks in the index that have the highest dividend yield. In the U.S. the approach is known as the Dogs of the Dow. In Canada it is known as Beating the TSX. Indeed, the method seems to work quite well in Canada.

Low Price-to-Earnings Ratios

This screen sorts stocks in the index by P/E ratio with low positive ratios seen as being beneficial. Stocks with negative earnings are removed from consideration. This is a classic value screen.

Low Price-to-Book Value Ratios

This screen sorts stocks in the index by P/B ratio with low positive ratios seen as being beneficial. This is another classic value screen.


Slightly More Complicated Screens

Dividends at Risk

Keep an eye out for stocks with high dividend payout ratios because the
dividend might be at risk. This screen highlights stocks with dividends that exceed their earnings which is a situation, should it persist, that will eventually cause the dividend to be reduced.

Value Ratio

The
Value Ratio approach demands that stocks have both a high dividend yield and low P/E ratio. The Value Ratio itself is simply a stock's P/E ratio divided by its dividend yield. Here low ratios are viewed as being good.


More Advanced Screens

I track many more screens for Rothery Report subscribers.


FAQ for the Data Tables
You can find the current tables by clicking on the links in the side column near the top of the page

The tables provide quintile rankings for the ratios on each stock rather than raw data. High rankings are viewed as good whereas low rankings are a point of worry.

How are the ranks calculated? All of the stocks in the index are sorted by a ratio and put into 5 groups. The 20% of stocks with the best ratios are given a rank of 5. The 20% of stocks in the next group down are given a 4. And so on all the way down to the 20% of stocks in the worst group which get a 1. Stocks without data, or with negative ratios, get a 0.

The ranking process happens with each ratio. So a stock with a low P/E ratio might get a 5 for P/E but if it also has a high P/B it might get a 1 for P/B.

In most cases low ratios are good but when it comes to dividend yield high values are the tops.

All the screens are performed on two large stock indexes. One in the U.S. and one in Canada. In Canada, the S&P/TSX60 is the index of choice because it contains 60 large Canadian stocks. In the U.S., we opt for the Dow Jones Industrial Average which contains 30 large U.S. stocks. Of the two indexes the Dow contains more blue-chip stocks whereas the S&P/TSX60 has a few weaker firms.

The earnings and sales data is generally based on results over the last four quarters. It is based on recent figures for book value and dividends. Quarterly results that have come out very recently may not have made it into the numbers yet.

The calculations are based on raw data from several different sources which may change from time to time.


A Word of Warning

Any quantitative screen should be the starting point in any investigation. Every investor should take a much more detailed look at a stock before investing.

 


Overview

Simple Screens

High Dividend Yield
  High Yield DJIA30
  High Yield TSX60

Low P/E
  Low P/E DJIA
  Low P/E TSX60

Low P/B
  Low P/B DJIA
  Low P/B TSX60

Dividends at Risk
  Dividend Risk DJIA30
  Dividend Risk TSX60

Value Ratio
  Value Ratio DJIA30
  Value Ratio TSX60

+ FAQ


 
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Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...