Can’t Compare Close or EPS to a Number

A lesson on absolute prices versus relative ones

A lesson on absolute prices versus relative ones

You’ve been referred to this page by something saying “You can’t (or shouldn’t) use Close > 5.00” in a stock screener. 

Imagine you are looking at a share of GoodStock (yeah, I know that’s a lame name for a fake stock!).  It goes up and up, and up!  If it follows the example of Berkshire Hathaway, it soon sports a 5 or 6 digit closing price, and people can’t buy the stock.  So, it splits, and splits again.  On the other hand, BadStock starts at $10, and soon enough it has a price less than a dollar.  So, it does a reverse split, gets its closing price up to $10 and goes on with its life.

So what does this mean for me?  That you shouldn’t compare per share quantities (Close, Open, High, Low, Volume, EPS, Sales_per_share, etc versus constantsClose > Close as of 200 days ago is fine, but Close > 10 is not.  Similarly, Close > Open is fine (they both have this history element included). 

What should I do?

You can convert Close to RawClose, Open to RawOpen, etc.  Or you can swap out your constant for something that factors the splits out.  Here are some example problems and how you can fix them.

High prices stocks are terrible!

When “Close > 444” is typed into a stock screener you are presented with the best short screen ever.  Ever!

All the biotechs that reverse split again and again help push this down to new lows.  Unless you’re psychic and can predict reverse splits and FDA failures, I wouldn’t try shorting this screen.

Now, instead of this working and giving you false hope, the system will simply return an error stating that you cannot compare split adjusted quantities. To remedy this problem, follow the steps in this article.

 If you swap the Close for RawClose (RawClose > 444), you get this.

Which is still nothing to write home about, but it’s not magical.

I want to get rid of penny stocks!

The next case this comes up is with the natural urge to get rid of illiquid penny stocks.  Here you have the opposite problem:  it looks like penny stocks sometimes outperform.  What do do?

The obvious, “Jam the Radar” solution is to again use RawClose.  But that does nothing for illiquid stocks.  So we use Close * Volume > 200k instead.  Why is this OK?  Because volume goes down with reverse splits, even as the price goes up.  The two effects cancel.  Heck, why choose?  Use both!

Large negative earnings

Sometimes a picture is worth a thousand words.  Unfortunately, EPS is also split adjusted, and so we again are being psychic without meaning to.

We solve this one by looking for companies with high negative PE values (we have to compute them manually since the built in PE excludes money losing companies.

This may be the beginnings of a good short strategy, but it’s not magical.  Luckily.

About henry

Henry Crutcher is an avid family guy, board gamer (think Settlers of Catan, Puerto Rico, etc), computer nut, and all around geek. Hailing from Louisville, KY, he has noticed that the weather in Louisville is remarkably similar to the weather in Atlanta, GA despite the 407 miles that separate them. He has two daughters, one cat, and lots of trees. He loves the Miles Vorkosigan series from Lois McMaster Bujold, for its mix of SF, comedy and insight into how people work. He also comsumes more than his fair share of cheesy business/economics books, such as The Ascent of Money by Niall Ferguson, or Farewell to Alms, by Gregory Clark.

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