An online diary of my investment philosophy based on the teachings of warren buffett, Ben graham, Phil fisher and other value investors. I post my thoughts and analysis of various companies and industries. My long term goal is to continue to beat the stock market by 5-8% per annum in a 3 year rolling cycle
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Friday, November 18, 2005
My problem with stock screens
Most of us know the problem with simple stock screens such as one’s based on low P/E ratio, low P/B ratio etc. A lot of stocks which get filtered through the screens are typically companies with poor economics. I have tried to overcome this problem by building a screen which has the following additional screening criteria
An ROCE/ROE of atleast 13% or more
No loss during the past 5 years
Above average growth over 5 years in NP
D/E < 2
Adding the above stock screens has filtered out companies in the following industries (partial list below)
auto components
bank
cement
Chemical
Shipping
Fertiliser
Shipping
Paper
Textile
I have started analysing one company at a time under each of the classification. Unfortunately the reason these companies have filtered out is either due to a cyclical uptick in the industry (cement, shipping, paper etc) or it is tier II company in the industry with high operating leverage and has seen a reduction in interest cost. Due these reasons , the recent PE, ROE etc of these companies is good, debt is down and these stocks look good. My concern is how these companies would fare once the cycle turns downwards. Let me explain using the example of shipping industry which I am analysing currently. The main companies in the shipping industry which have filtered out through the screen are
mercator lines : High asset addition recently through debt which has resulted in high earnings and high ROE. The risk to the business is high if the business cycle reverses as the company may be unable to service its debt
Varun shipping / Shreyas shipping: high operating leverage, high debt and high growth in earnings in recent times due to high shipping rates. Earnings risk is high due to operating leverage
Essar shipping : High earnings due high shipping rates. Also ROE is high to asset revaluations. This stock looks interesting and worth investigating further.
I guess the stock screen is throwing up a lot of companies which may be statistically cheap but not really a value stock. So essentially I am not be able to come up with a list of companies which are great value. I guess it is to a certain extent an indication of the kind valuation levels existing in the current market (The same filter in 2003 gave much better companies). So I guess I will have go through the entire list and maybe at the end (the list has 100+ companies) come up with a few good stocks. It defintely not a waste of time because it helps me to understand more companies/ industries which could be helpful in the future
I understadn your problem as I go through the same thing. What I try to add to my screener is year to date return or annula return negative 15 % or more. This way I try to determine why the company has gone down given that fundamentals are good. Typically you will find a temporary set back or a bad news that can be corrected. This can be a buying opportunity. This way you can ensure your paying good price for good company. It is really difficult to find value with general screens liek you mentioned.
i think the best way is to ignore screens...look at companies as stand alone businesses...understand the business (up/down cycle, management, industry etc) and then make decisions.
screens of 52 week lows works in the US.In the current Indian market, any screen might only throw expensive stocks now.
How do I create a stock screen consisting of the multiple criterion as you have talked about? In ICICIdirect site I got only a few preset criterions. Praveen
I understadn your problem as I go through the same thing. What I try to add to my screener is year to date return or annula return negative 15 % or more.
ReplyDeleteThis way I try to determine why the company has gone down given that fundamentals are good. Typically you will find a temporary set back or a bad news that can be corrected. This can be a buying opportunity. This way you can ensure your paying good price for good company. It is really difficult to find value with general screens liek you mentioned.
thanks abhi , good input to add to my stock screen. i assume the YTD return you are referring to is the stock price.
ReplyDeleteyes, stock price.. as percentage. I typically use -15% or more negative return
ReplyDeletei think the best way is to ignore screens...look at companies as stand alone businesses...understand the business (up/down cycle, management, industry etc) and then make decisions.
ReplyDeletescreens of 52 week lows works in the US.In the current Indian market, any screen might only throw expensive stocks now.
Pradeep
Two of your shipping 'hits' had problems with higher debt.
ReplyDeleteShouldn't a 'debt to equity' check guard against that debt?
yes ...i have kept the filter at 2 which is fairly high for a cyclical industry. tightening it to <1 would filter out these stocks
ReplyDeleteHow do I create a stock screen consisting of the multiple criterion as you have talked about? In ICICIdirect site I got only a few preset criterions.
ReplyDeletePraveen
which screener to use?
ReplyDeletei have been using icici direct screener but couldnt filter out industries with poor economics