Our rating system has guided millions of investors in the past 20 years.
Blue-chip stocks the largest, most consistently profitable and prestigious companies. These stocks command a valuation premium because of their ability to deliver earnings and dividends year after year and because they have already been 'discovered' (that is, they are widely tracked and known in the market). It is popularly believed that such stocks are less risky than their smaller counterparts and this is true to a certain extent on account of their high market share and strong balance sheets.
Book value is an accountant's measure of the worth of a company's equity. The key basis of this screener is that markets are less reliable than accountants because markets can be volatile and irrational while accounting estimates are conservative. Buying a stock below book can provide what Ben Graham called a 'margin of safety.' On the other hand, stocks available at a steep discount to book value can also have high risk, a poor growth outlook and low returns on equity. So we applied appropriate checks to provide for these risks. These checks look at return on equity, leverage and growth.
Why choose between chocolate and vanilla when you can have both? Growth at a Reasonable Price (GARP) popularised by Peter Lynch combines growth and value investing. The former focuses on earnings growth and the latter on finding companies trading below their intrinsic value. Only great way to find such companies is through the the PEG or the Price/Earnings growth ratio which compares a company's P/E ratio (valuation) with its expected earnings growth rate in the coming years.
'Cows for their milk, hens for their eggs and stocks by god, for their dividends' goes a popular rhyme. High dividend paying stocks pay out a steady income allowing investors to move away from capital appreciation alone. They also allow investors ride out periods of little or no price appreciation, when markets fall. However buyer beware, the stream of dividends must be steady rather than sporadic and high dividends can cut sharply into future growth as the company is left with little money to invest. Such dividends cannot be sustained.
Safety first. This filters uses our essential-checks feature (available on the stock pages) to check the soundness of companies and adds in checks for valuation. The safety checks include, the Altman Z-Score which predicts the likelihood of financial distress; the modified C-Score which throws out the the probability of creative accounting and the Piotroski F-Score which compares financial performance with the previous year's. To these, we add tests concerning a company's price-to-earnings ratio, price-to-earnings growth and earnings yield, all of which cull out the 'safe but pricey'.
'Small is beautiful' as the title of a popular economics work goes. Small companies are less likely to be followed by institutions and analysts and are hence more likely to present opportunities for the savvy stock picker. Some of them scale up to become large companies, generating great returns for investors along the way. On the other hand, they have a lower ability to withstand shocks and market downturns. A investor following this screener would do well to diversify.