A stock screen is a filtered list of stocks. The filtration is done according to some criteria that is likely to remove less investment-worthy companies from the list.
01-Sep-2006 •Value Research
A stock screen is a filtered list of stocks. The filtration is done according to some criteria that is likely to remove less investment-worthy companies from the list. For example, a (very) simple stock screen could be a list of companies whose profits have increased during the last year. Normally, most screens are a little more complex and apply many criteria simultaneously to arrive upon a list of stocks that may be worth investing in.
It is important to understand that stock screens are not the final step in choosing investments. If you just buy stocks listed in a stock screen, you could well end up buying a bad investment. Instead, stock screens are the first step in the process of choosing stocks. They throw up investment ideas which can then be studied and evaluated by a closer study of the companies.
The following pages give you a series of stock screens. Each has description of the screen used along with the companies that were thrown up by the screen. All these screens were applied after applying the basic filter of membership of the BSE 500 index.
Value investing is one of the very popular strategies to build a portfolio of stocks which have the potential to outperform over the long run. The strategy found favour with legendary investors like Benjamin Graham (who is also referred to as the father of value investing by many). The premise of value buying is to look for stocks which are trading at a discount to their intrinsic value. Two important ratios used to initiate the search for such stocks include price-earning ratio and price to book ratio.
PE ratio is the most popular measure to judge whether the stock is available cheap or expensive, and is calculated by dividing the stock's current market price with its earning per share. PB ratio is a useful measure to compare a stock's market value to its book value. If both the ratios are significantly lower than market averages, then it could mean that the stock is undervalued. Such stocks can also have a high dividend yield.
We searched for stocks which have a price-earning ratio of less than 10, price to book ratio of less than 1.5, and dividend yield of at least 3 per cent. 18 stocks made it to our list, which includes a lot of banks. It is sorted in the descending order of PE ratio.
Jump in Q1 Earnings
Indeed, the good corporate results have provided a much-needed confidence boost to the markets as they are back in action and raring to cross the 12,000 mark again.
When we had published this screen last month, the results of only 126 of the universe of BSE 500 companies were available. Therefore, we had decided to visit it again this month. Last time, our criteria was to search for stocks whose earnings per share for the quarter ended June 2006 is at least 30 per cent higher than the earnings for each of the preceding four quarters. But in the wake of exceptional results posted by more and more companies, we substantially raised the bar. This time, the list is restricted to only those stocks whose earnings per share has jumped by more than 100 per cent in comparison to each of the preceding four quarters. Further, the stocks which reported negative earnings in any of the last five quarters under consideration have been excluded.
13 stocks qualified the criteria. But you should not be over-optimistic about these stocks simply on the basis of an exceptional rise in earnings. It could simply be the result of an aberration. A substantial jump in earnings in a particular quarter can often turn out to be due to some non-recurring income. Since such earnings surprises are not expected to repeat in subsequent quarters, buying into such stocks thinking that they are going to be the next big growth stories will be a mistake. Therefore, while this screen can be a useful first filter, you will have to delve deeper to identify the real growth stories. The list is sorted in the descending order of earnings per share for the quarter ending June 2006.
Dogs of the Nifty
There is a well-known strategy of investing on the Wall Street called Dogs of the Dow. It can basically be considered as a contrarian strategy of investing equal dollar amounts into the ten most of out of favour stocks in the Dow Jones Industrial Average, based upon the dividend yield of stocks. An investor buys the ten highest yielding constituents of the Dow Jones Industrial Average, hold them for a year, and then repeat the same exercise after an year to switch to the new highest dividend yielding stocks. Over the years, the strategy has proved effective to generate good returns and outperform the markets.
The idea is to buy into quality companies whose prices are depressed at the moment, hoping to exit them after the have run-up again and switch to the next set of out of favour stocks. The simplicity and ease of implementation is a plus.
For those who would like to replicate the strategy on the domestic bourses, this screen will be of use. Here we present the ten highest dividend yield constituents of the Nifty. The list is sorted in the descending order of dividend yield.
High Dividend Yield Stocks
Receiving a dividend cheque in mail can be a source of immense pleasure to a lot of investors. Though equity investments are thought to be primarily meant for capital appreciation, but dividend can be source of valuable income particularly during the tough times. In the previous screen, we restricted our search for high dividend yielding stocks to only the top 50. Here we delve deeper into the entire universe of BSE 500 constituents. To make it to this list, a stock should have a dividend yield of 4 per cent or higher. Since the objective is also to look for consistency in dividend payment, only those stocks have made it to the final list that have a track record of paying dividend in each of the last five financial years.
The list should appeal to those who are looking for a consistent income stream from their equity investments. Even though there can be no surety of dividend from equity investments, but companies which have a consistent track of dividend declaration are generally expected to adhere to their dividend policy. The list is sorted in the descending order of dividend yield.
Automobile stocks seem to be losing favour with the fund managers. There are three prominent automobile sector stocks among the ones that were sold the most by fund managers over the month of July. Stocks of two-wheeler giants Hero Honda and Baja Auto as well as the car-market leader Maruti Udyog were offloaded in significant numbers. Major sugar stocks- Balrampur Chini and Bajaj Hindustan were also shown the door by some fund managers.
On the other hand, one interesting stock that has been bought in large number is India Cements. The company came out with exceptional results in the last quarter, and the stock also figures in the screen "A Jump in Q1 Earnings". You can read more about this stock in this issue's cover story.
The lists are sorted in the descending order of change in investment.