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Stingy Investor Tip Sheet

Screening Trouble

It's no secret that I like stock screens. I think most modern investors do because they help uncover interesting stocks. But screens aren't without their flaws. I was reminded of this when I recently updated a slew of Graham-inspired stock screens in a special report for Rothery Report subscribers.

One big problem with screens is that they can be an efficient way of collecting errors. I highlighted one such problem in my special report. My take on Graham's Simple Way screen for Canadian stocks came up with Russel Metals (RUS). Based on the raw data from one screener, Russel sported a dividend yield of 20.8%. Problem is, Russel cut its dividend just a few days previously. Based on the new dividend rate the stock was actually yielding 8.7%. This situation highlights a big potential problem with screens. The data they're based on may be out of date. In Russel's case, the old dividend rate lingered. Regrettably, this sort of thing isn't rare.

Another example from the same Simple Way screen came in the form of Teck Cominco (TCK.B). I used Globeinvestor and they pegged Teck's debt-to-equity ratio at 0.20. But Teck recently reported its Q4 results and it's debt-to-equity ratio is now closer to 1.9 because it pilled on a heap of debt when it bought Fording Canadian Coal Trust. Based on the new debt ratio, Teck doesn't pass the Simple Way test.

This sort of problem drives me bonkers. But it is also one of the reasons why I constantly warn my readers to double check and to read all of the latest news on any stock before investing.

Canadian investors should also be aware of a slew of sneaky currency issues. Dividend yield calculations come to mind again because several Canadian stocks pay U.S. dividends. Fairfax Financial is a good example. The firm currently pays an $8US per share dividend. So, it is easy to calculate Fairfax's yield using its U.S. stock price (FFH on the NYSE) but you have to do a currency conversion if you only have its Canadian stock price (FFH on the TSX).

It doesn't stop there. Fairfax reports results in U.S. dollars. So, if you're using a Canadian dollar stock price, you have to convert earnings when calculating price-to-earnings ratios. (The same thing goes for many other ratios.) But with earnings you run into a subtlety. Do you take the firm's trailing 4-quarter earnings and covert them at today's conversion rate or do you convert each quarterly earnings result at the exchange rate for that quarter and add them up? I've seen both approaches used by data vendors.

Programming bugs are also fairly common along with missing or incomplete data. I like to run my version of Graham's screen for defensive investors using the screener. Regrettably, I've likely been overly harsh on many firms by demanding that they have a positive price-to-earnings ratio over the last five years. This proviso in there to avoid companies that had an annual loss over the period. However, the MSN screener appears to report 5-year P/E lows for only a few firms. As a result, I now check each stock's earnings history manually and thereby uncover more interesting stocks than I would have otherwise.

This is all to say that screens can be very useful tools, but they're only the first step. Make sure to dig into the details before investing in any particular stock.

05/02/2009   5:30 PM EST   Permlink   save & shareScreens

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