My Screening Criteria

How I find companies to look into

An important part of investing is finding out where you can invest, and so I wanted to take some time today to go over some of the tools and criteria that I use to quickly screen for companies that might be worth looking into.

The Philosophy

The first thing that we need to understand is that screening is not research.

You should not set up a screen and blindly buy every company that shows up in it, and hope everything goes well.

Screening is about telling you what companies not to bother researching.

It’s about excluding companies that you’re very unlikely to ever want to purchase, rather than about including companies that you must buy.

And so any screening criteria needs to be well defined, have some leeway for temporary setbacks, and clearly outline what you want to see in businesses you’re looking to buy.

So, for that, I define the following goals:

• The company must be returning capital to shareholders

• The company must be profitable

• The company must be cheap

• The company must not be in severe decline

• The company must be a real business

Each of these goals generally align with what I want out of a business, and it’s extremely unlikely that I will ever willingly purchase businesses that don’t fullfill those conditions.

Of course these goals will be different for each person, for example perhaps a more growth focused investor would replace the “Must not be in severe decline” with a “Must be growing fast” goal.

Everyone is different, and I recomend you to write down your real goals and use them to define your exact screening criteria, and to evaluate your porfolio regularly to check if the businesses you own match your goals.

The Tools

The next step is to find out which sources and tools you will use to get the list of companies you’d like to screen, and to define your exact screening criteria.

There are many free, and paid services that provide these tools, and I’m sure you will have heard of at least some of them before.

Finviz, Yahoo finance and others are good free options, though they can be a bit limited in their functionality sometimes.

For me, right now, I’m using Stockopedia, which you can try out using my link here.

Stockopedia is a paid service with a lot of features that has let me seriously broaden the scope of my screening, the functionality and data available in it is very expansive and frankly the best that I’ve used so far.

But of course, as a paid service it’s not suitable for everyone, if you have only a small portfolio then it makes little sense to pay the subscription fee since any leads you’d be able to generate from it would likely not payoff the cost of the service. For small investors you’re better off minimizing fees and using only free services.

On the other hand if you have a large portfolio, and would really like to take your screening and research to the next level, then Stockopedia is a great option for you.

If you’re on the fence, just use my partner link to get access to a free trial.

My Screen

So, let’s take a look at my exact screening criteria, and see which companies show up:

As you can see I have 6 specific and exact criteria that I use, so let’s go through it:

• Dividend Yield > 1%

• Return on Average Assets (5 yr Avg) > 7%

• Net Profit Margin (5 yr Avg) > 15%

• Price to Earnings Ratio (5 yr Avg) < 15

• Sales CAGR (5 yr) > 3%

• Market Capitalisation (USD) > 150 m

Each of these specific criteria matches with at least one of my goals, for example the requirement for a dividend yield means the company fullfils the “Must return capital to shareholders” goal, and the ROA and Profit Margin fullfil the “Must be profitable” goal.

Of course the exact numbers may also be unique to each investor but those are the numbers I’m comfortable with.

So, let’s take a look at some of the companies that show up here:

In total there’s 138 companies that fit this criteria, from all over the world!

There’s US, Turkish, British, Swedish, Polish, etc… companies which all match the criteria, and which I can then choose to research in greater detail.

Of course not all of these companies will be suitable for my portfolio, either because I already am exposed to some of the industries and factors that they represent, or because they are in industries which I personally do not particularly want to invest in for various reasons.

A perfect example here is DKL 0.00%↑ :

I have no issues with oil companies in particular, but generally speaking I try to stay away from energy and basic materials producers because their revenues and profits are intrinsically connected with the market price of the commodities they are producing.

Since I have little knowledge in where those prices will go in the future, it’s difficult for me to value businesses that are highly linked to those prices, and so since I have no edge there, I choose to stay away.

That’s another important part of investing, knowing when you’re not capable enough to value a business.

So let’s take a look:

This company showed up in the screener, and as a first impression it feels like an interesting company, even if it meets my “basic Materials” exclusion criteria.

I generally like companies that fulfill a niche, and do so well, and a specialty chemical company certainly fits that bill!

So on my next blog post we will be analyzing the Celanese CE 0.00%↑ to see what it’s about and whether or not it’s appropriately valued.

If you’d like to get that analysis when it comes out, subscribe!