What it means
There are tens of thousands of listed companies worldwide, and nobody can read all their reports. A screener lets you enter rules and returns only the shares that pass them.
A rule might be market capitalisation above $1,000,000,000, a price-to-earnings ratio below 15 and a dividend yield above 3%. Criteria usually fall into three groups.
Descriptive filters choose country, sector and size, valuation filters use ratios such as price-to-earnings or price-to-book, and performance filters use growth in sales, profit margins, debt levels or price momentum. Some screeners also include technical filters such as moving averages.
Professionals use screens to generate ideas, to monitor a universe of companies and to exclude companies that fail basic tests. A fund with an ethical policy might exclude certain industries, while a value investor might screen for low valuations and strong balance sheets.
A corporate development team might screen for acquisition targets of a certain size and profitability. The limits are important.
A screener relies on reported data, which can be out of date or inconsistent across countries, and a company that passes the tests may still have problems the numbers do not show. Low ratios sometimes signal trouble rather than bargains, which is sometimes called a value trap.
The best approach is to treat the screen as the start of research. Look at the reasons behind each number, read the latest report and compare the company with its peers.
Also save and rerun your criteria regularly, since the list changes as prices and results change. A good habit is to write down why each rule is there.
If you cannot explain why a company needs a debt ratio below a given level, the rule is probably borrowed from someone else's strategy. Documented rules also let you test whether a screen would have worked in the past before you rely on it with real money.
In practice
Real-world examples.
Example
A fund analyst screens for companies with market capitalisation above $2,000,000,000, debt below 50% of equity and sales growth above 10% for three years. The tool returns 38 names from several thousand. She then studies each of the 38 in detail instead of starting with the whole market.
Example
A corporate development manager at a packaging company wants to find possible acquisition targets. He filters for firms in a given sector with revenue between $20,000,000 and $100,000,000 and operating margins above 8%. The resulting list becomes the basis for outreach.
Example
An individual saver who wants income screens for companies with a dividend yield above 4% and a history of paying dividends for ten years. After reviewing the list, he drops two companies whose payouts exceed their earnings. The screen saved time, but the reading made the final decision.
Case study
Seen in the real world.
Fernhill Advisory is an illustrative, fictional boutique firm that builds model portfolios for clients. Its analysts used to browse company reports by hand and could cover only about 60 companies.
They set up a screener with five rules covering size, profitability, debt, valuation and earnings stability, which reduces a universe of 4,000 companies to 55 candidates. The team then spends its time reading annual reports and speaking with management teams for those 55.
In one review, a company that passed every rule turns out to have a large legal claim disclosed only in the notes to its accounts, which no screen picked up. The illustrative lesson is that the screener narrows the search quickly, but human judgement and reading are still required. The firm now keeps a log of every screen it runs, recording the date, the rules and the number of names returned. Each quarter the head of research compares the list against what was eventually bought, which shows which rules earn their place and which only add noise. Over a few years the log has become a useful record of how the team's thinking has changed.
Watch out
Common mistakes.
- Buying a share simply because it passes the screen, when the numbers may hide risks that only a careful reading of the accounts will reveal.
- Using too many filters at once, which can leave an empty list or produce results that are too narrow to be useful.
- Trusting the data without checking dates, definitions and currency, which can differ between companies and countries.
Questions
People also ask.
What is a stock screener used for?
It is used to turn a huge universe of shares into a short list that matches your criteria, so you can focus your research on likely candidates.
Which filters are the most common?
Investors commonly filter by market capitalisation, sector, price-to-earnings, dividend yield, revenue growth and debt levels.
Are stock screeners free?
Many websites offer basic screeners free of charge, while professional versions with deeper data and more filters usually carry a subscription fee.
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