How to Use Stock Screens

Financial experts and advisors agree – it’s better to start a “good enough” investment portfolio rather than procrastinate due to uncertainty or lack of knowledge. If you’re truly hesitating on starting an investment portfolio due to lack of knowledge, you should consider using stock screens.

There’s a lot of skepticism surrounding stock screens; some people think they’re a complete waste of time, while others find them too complex to bother with. But there’s no reason to dismiss or be intimidated by these valuable tools. When used properly and for the right planning scenario, a stock screen can help you sift through mountains of data to focus on investments that meet a certain predetermined criteria.

Before pass up the opportunity to leverage stock screening, look at some of their distinct advantages:

They Save Valuable Time: As you know, there are thousands of stocks to comb through, and there’s simply not enough time in the day to dig into every financial statement, ratio, or multiple. But a stock screen, at minimum, serves as a solid starting point for identifying investments. It allows you to quickly set your parameters—and the more stringent you are with the criteria, the more you can winnow the field.

They Eliminate Behavioral Biases: While financial advisors are trained to avoid bias and focus on performance, they are still, in fact, human. But a stock screen—when properly employed based on cold, hard metrics—ensures companies will only make the list based on the specific guidelines you’ve set forth. That fact alone keeps the process objective.

They Can Identify New Investments: While this depends on the robustness of the database you’re using for your stock screen, comprehensive ones can provide hidden gems. Investing is all about finding opportunities at the right time, and a stock screen can often turn up companies you’re less familiar with—companies that are undervalued in the current market.

Whether you want to follow the principles of Warren Buffett, uncover the best value stocks, or base your search solely on capitalization, utilizing a stock screen can be beneficial, especially when used as a supplemental tool.

How to Choose a Stock Screen

When choosing a stock screen, consider these three factors:

Accuracy: Not all stock screens are created equally. Perform your due diligence, checking where the research comes from, before settling on an option. The stock screens you set up are useless without reliable data.

Diversification: If you cast a wide net, it will be easier to find a stock that meets your unique criteria. While in many cases quality is more important than quantity, with stock screens it’s important to choose one that offers a full breadth of stocks in the database.

Customization: We mentioned parameters above, and the more a stock screen offers, the better. The ability to filter a screen by industry, valuation ratios, and more allows you to whittle stocks down. Typical filters would include (but not be limited to):

  • Stock exchange
  • Country or region
  • Industry
  • Market capitalization (cap)
  • Dividend yield
  • Price
  • Target price
  • Trading volume (current, average, or relative)
  • Volatility
  • Price-to-earnings ratio
  • Earnings per share (EPS)
  • Growth rates

Other factors go into choosing a stock screen, such as ease of use. While a variety of options exist online, finding one with an interface that fits your needs means you’ll be more apt to use it when you need it. For example, if you’re considering choosing overseas investment funds, use a stock screen that offers a country or region filter. Also avoid stock screens that use their own algorithm since feedback bias or lack of transparency may skew your results.

How to Use Your Stock Screen

Once you’ve found a stock screen that you’re comfortable with, you’ll need to determine your ranking system. Two typical options are an absolute or relative ranking system. The former means you’re only choosing stocks that meet all of your parameters. This takes discipline—if stocks don’t meet your criteria on the day you screen, you’re not making any investments.

In contrast, a relative screening solution means you give yourself some wiggle room; maybe no stocks meet 100% of your criteria, but you can make choices based on it meeting a certain subset of requirements—in other words, it’s not all or nothing.

As you create a portfolio from your stock screen, there are other considerations, including:

Risk Tolerance: Aggressive investors typically hold a handful of stocks, while conservatives hold a range of 30–50, so diversification, as usual, is important.

Concentration: Diversification applies to more than risk; don’t overweight one industry or sector.

Tie-Breakers: Sometimes more than one stock will be screened as a good buy, so include a variable that’s important to you to break the tie.

Rebalancing: Once you’ve made your purchases, your screen is still extremely handy; use it to analyze or compare your portfolio—and to replace stocks that now aren’t meeting your criteria.

Tax Ramifications: A screen doesn’t change that there are tax consequences for your buy and sell decisions, so plan accordingly, and consult your tax advisor.

Remember: A Stock Screen Is Just One Tool

Keep in mind that a stock that passes your screen may have underlying issues that make it a poor option for a portfolio. Your screen isn’t going to tell you how long to hold a stock, either. As we said at the outset, a stock screen is merely a tool—it’s one aspect of a holistic portfolio management system. While it can certainly serve as a starting point, or even as a preliminary step, additional research is always necessary to make savvy investment decisions. If you’re just getting started, follow a Getting Started in Retirement general guide, then move onto a more sophisticated option, such as stock screens.