Nifty screener criteria and ideas

For an old stock dog like me… the thing I love most about Stockopedia is the idea generation it can create.

Remember, as a Fundamental Investor, if you want to identify stocks before everyone else, you need to find them first. Using screens is an excellent way to quickly sift through the 2000 stocks on the ASX in order to do this.

But is it possible? Despite the amount of optics on our market, it isn’t terribly efficient. Therefore it is possible to find hidden gems, and the Screener is a great way to find where the fish may be biting next.

This article will discuss some of the individual screener items and how they may be used to identify a stock worthy of consideration. Though I stress, as I would with any screening tool or set of criteria, that this is just a filter of information. Once a short list is derived, further research is required as to whether the stock is indeed an opportunity right now.

StockRanks are the obvious places to start. As I have mentioned a number of times in various forums, I am a QM (Quality/Momentum) investor so I have a number of scans available for me to use to identify such businesses.

But outside the powerful screening of Factor Ranks and the overall StockRank (which really is 90% of the value in Stockopedia) here are some little hints and criteria to help you when using the scanner.

Note: None of these ratios should be used in isolation, rather they should be combined with others. Nor is it an exhaustive list by any means, of the criteria within the Screener. But hopefully they will stimulate some thought on how you can use this powerful feature within Stockopedia to your advantage.

Quality criteria

There is a saying when it comes to analysing a company’s set of accounts, “Revenue is Vanity, Profit is Sanity…. But Cash is King!”. Any metric that allows us to delve deep into a company’s cash generating capability is always going to be powerful when attempting to find quality stocks.

One such measure is Cash Return On Invested Capital (CROIC) which is the Free Cash Flow of a company divided by the Invested Capital into a business.

The logic here is the higher the number, the stronger excess cash generation per every dollar invested in the business (be it debt or equity). The higher the number the better the result.

Stockopedia suggests a result of 10% or more which is fine when combined with other criteria. Investors wanting to set stronger margins of cash safety may wish to select 20% or more.

Also as an investor in the Australian market we are all too familiar with companies' insatiable thirst for investor capital - especially the ones with no earnings. Now, unless you are content to pursue philanthropic activities by giving executives money for doing nothing, I suggest you look at the Share Dilution criteria.

When selected over a period of 5yr CAGR (this is a 5 year average rate) this criteria can show you instantly a company's past history of looking after shareholders without diluting the interest of early adopters. While not all capital raising is bad, a company too focused on going cup in hand to investors often becomes enamoured with the idea and soon follows with another raise .

A benchmark of less than 2% is sufficient to capture the occasional raising without too damaging a dilution. Remember a negative number here means that the company has reduced the shares on issue over the past 5 years. This is a great result for investors.

Value criteria

I know the P/E is commonly used to measure a company’s value. Though most mistakenly use it as an absolute measure choosing to interpret an arbitrary figure as a decision point. For example P/E of 25 = Expensive. This is incorrect in my view as I find it more relevant as a relative measure. Company A and Company B in the same industry can be compared with P/E, however doing so with Company C who is in a completely different industry is not correct.

Another issue with the P/E is that it uses ‘Earnings’ as the denominator in the equation. After tax profits can be heavily influenced by accounting influences and reporting standards. One way to alleviate this concern is to use a less /manipulated figure in EV/EBITDA (Enterprise value to Earnings Before Interest, Tax, Depreciation and Amortisation.)

I like to use this figure for relative analysis. This is because using EV is a more capital structure-neutral measure in that it includes debt. EV/EBITDA is my go to measure for analysing value on a stock as it helps mitigate some of the issues a simple P/E measure has.

Now back to my fixation with cash flow, another measure I use when it comes to relative analysis is Price to Free Cash Flow. Again this is because cash is less susceptible to manipulation, and the use of free cash flow means I am also taking into account the capital expenditure of a business which can be a drain on operations if unmonitored. While again it would be simple to say that a lower figure is better, its best to use this measure against peers in the same industry.

Momentum criteria

While I lean heavily on the Momentum Rank within Stockopedia given it incorporates earnings and price momentum, the scan can help focus you on stocks of interest that are more interesting purely from a price perspective.

The entire Stockopedia Ranking system is based on relative returns. For example, say Company A has fallen 1% this year, but the market has fallen 25%. There is a good chance Company A will rate highly as the price was well above the market despite the return being negative. I like to use the Relative Strength measure, particularly in downtrending markets as it may indicate the market has a favourable fundamental disposition on the business, and therefore it is more protected from broader sentiment.

For Australian users of Stockopedia this measure compares the price performance of a stock against the All Ordinaries Index. If the result is greater than 0 then it means the stock has performed better than the market over the time period selected.

This indicator is also particularly valuable for investors seeking to avoid “value traps” as a company with good fundamentals may still be on the nose. While stocks going down when the market is going down is not usual, stocks going down when the market is going up may need further investigation.

52 week high

Readers of the Momentum Monday reports would have noticed a new addition recently. A list of stocks within 5% of their 52 week high.

The theory of purchasing stocks close to their 52 week high is well documented and Stockopedia members are able to use the Scanner tool to find them.

Select the 52 week high criteria and enter the parameter as greater than -5%. This means that the search will be for stocks trading at least 5% or less from the 52 week high of the company. A result of 0 means the stock closed the day right on its 52 week high level. A result of -1.5 means the stock closed 1.5% below the 52 week high level etc etc

Size

In a recent article about how you can use the Screener to find possible mining juniors I spoke about comparing the market cap of a company to its enterprise value. If you wish to reread that article it can be found here.

In it a scanner criteria is set using the Advanced Functionality of the filer to identify stocks whose enterprise value is at least 70% of the market cap which for a junior mining explorer suggests a large cash balance.

Just to refresh your memory. Start by selecting the EV criteria. And then click on "Advanced" and select "Compare". Once the next set of fields appear, change ‘greater than’ to ‘less than’ and in the value box enter a percentage as a decimal number eg 0.7 (this means 70%). The final step is to then in “select ratio” choose “market capitalisation”.

This scan above will identify stocks where the Enterprise Value is at least 70% less or larger than the market cap. Remember to make sure you focus on the industry when using this criteria in this manner.

Further, one of my mentors, Frank Watkins from Protrader Software, regularly professes that he does not like stocks where there are more than a billion shares on issue (and for good reason).

In order to avoid these highly diluted stocks, select the Total Shares Outstanding criteria and select less than 1,000,000,000

This will ensure that companies appearing are not over diluted. Too many shares on issue crimps potential gains as the company's market cap is significantly impacted, even by the most insignificant of price moves.

Tip: Don’t use forecasts with Micro Caps

In my experience when looking for undiscovered small caps, refrain from using criteria that include any forecast elements.

Forecasts from Brokers are not available for all companies (only about 40% have them, even less if you are looking for reliable and current numbers) therefore using forecasts limits your research universe. For example if you search for forecast EPS of greater than 10% and a company has no forecasts, then it won’t appear in the scan despite it being on a strong growth trajectory.

The downside of this is that you will need to do more research into the prospects of the business. But if I can use an analogy here, if you’re trying to find the prospect of gold you use a metal detector, but to actually find it, you have to dig a hole. And that requires some work.

If you do decide to use forecasts in your scans, to help improve the veracity of the analysts’ opinion enter No. of Broker Covering and select greater than 2.

For companies where only one analyst is covering, often that view is portrayed through rose-coloured glasses because that analyst has been asked to prepare a report in preparation for a capital raise or at the behest of a company. Ensuring there are at least 3 different views on the stocks adds somewhat to the robustness of what is being presented.

One final trick (advanced users only)

One reason I like to use the scanner, especially around this time of year, is that I can try to identify stocks that were loss making but are now profitable.

The hope here is that while the company may have been loss making prior, now they have flipped the coin and are ready to start generating profits from now on.

Of course you need to do more research to see if this is indeed the case, but this scan is a useful place to start looking when trying to find this scenario.

To complete this process follow these steps:

• Type “Normalised Earnings per Share” TTM and ensure that is greater than 0

• Then select the “Sort by” criteria Normalised Earnings per Share - and here is an important step - make sure you select “Prior TTM” as the time period you are sorting by.

• Further, change the sorting list to ‘Ascending’

Now think about it…. We have created a filter showing stocks who have the most recent 12 months EPS as positive. However we have sorted the data by their previous corresponding EPS figure, sorted by the loss makers up the top.

I can now see side by side companies who are profitable today, but they were loss making last year.

From here I can commence my research to see if the stock was a perennial loss maker and has now turned positive (this is what I am looking for - For example Health and Plant Protein (ASX:HPP) has never made a profit, but they achieved their first one last year). Or whether it was simply a case of volatile earnings (which I am not trying to find - for example Origin Energy (ASX:ORG) comes up. This company has been very profitable in the past but had one tough year, but has since recovered.)

Of course you can do this with any ratio that has “PriorTTM” as a selectable time period. But be sure to do your further research into each business as they may not investable (eg like HPP).

If you have some favourite scans that you think others could benefit from feel free to share them in the comments below. I for one would love to read them.

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