dimanche 26 avril 2020

How I screen stocks

A few years ago, I used to screen stocks on Value Line with a lot of metrics.

Then, I realized that only three or four metrics were really useful to find the best companies:

1- Stock predictability;
2- Growth Rate over the last 5 years;
3- ROE.

The order of the list is important. To me, the most important metric is now "Stock predictability". It shows how predictable is a stock and, frankly, that's probably the most useful thing to know, because it shows how confident you can be about the appreciation of your stock.

Then, the growth rate over the last 5 years. Why looking at the past instead of the future? Because I don't see why I should have any confidence about future growth for a stock that didn't grow in the recent past. Plus, usually, when the growth was good or great in the recent past, chances are that it will remain interesting in the near future. Not always, but most of the time.

Then, the ROE. I used to be very picky about the ROE. But, I'm now more flexible. I own some companies with a ROE in the range of 15-20 while I used to look at stocks with a much higher ROE. Well, that metric is important for your whole portfolio. But if you own 20 stocks, I think that it's OK to own 3-4 stocks with a lower ROE, if the growth is interesting.

Then, other things such as debt level, cash on hand, margins, beta, forward PE and some more are important. But a deeper analysis is only done when stocks respect my three criterias. There may be one or two exceptions in my portfolio, but not more.

One stock that respects that screening: Microsoft.

3 commentaires:

  1. Following some tips from Penetrator and Edutrater, I tried to look at the top Canadian stocks screening high on rolling average ROE (15%+ for 10 years), ROIC (15%+), at least average predictability, and EPS growth (10%+ over past 5 years). Only 5 companies in Canada made it through the screen, if we lowered the EPS growth to 5%+ only 7 make it through. That is quite slim pickings.

    From high to low ROIC, the companies are:
    CSU = Constellation Software = software
    ENGH = Enghouse = software
    DOL = Dollarama = dollar stores
    RCH = Richelieu Hardware = screws and metal trinkets wholesaler
    CCL = Connecticut Chemicals Limited = plastic packaging materials
    MG = Magna International = auto parts
    CGI = Consultants to Government and Industries = software and IT outsourcing

    Magna and Richelieu failed on the 10%+ EPS growth criterion. I think EPS growth is very important. Otherwise, if you look at just high ROE/ROIC you will get dead companies which are just being run into the ground like Yellow Pages. Growing companies will genereally not have good ROE or ROIC since they will be investing a lot of money into increasing their capacity. I think that is why serial acquirers/consolidators screen well on these criteria since they gobble up mature businesses and thus can have high return on capital from all of their parts while the M&A compensates for organic decline and generates some EPS growth.

    For my current portfolio, CSU is 9%, ENGH is 7%, DOL is 6%, RCH is 1%, CCL is 5%, I do not own Magna (but LNR is 3%), CGI is 3%. The rest is 8% cash and the remaining 58% are other stocks, mostly alternative mortgage banks. I am sad because I am a lot underwater and had no money to buy anything for the past almost 2 months when the firesale was on and now everything jumped up a lot and I do not know what to do.

    Have a nice day everyone!

  2. Hey Penetrator, do you know what subscription level you have with Value line to get those metrics including predictability? Looked at their subscriptions and there are like 20 different kinds.

    1. My access is via BANQ, a Quebec organization. You probably have something similar in your province (if you're from Canada but outside Quebec).