At its core, a stock screener is a tool that allows you to search for stocks based on certain parameters. You offer a list of arguments, such as look for companies that have –
A market cap greater than $3 billion
A positive increase in net income over the past year
A Positive EPS
Offers a dividend
By inputting these values into a stock screener we are successfully able to find every single company within the stock market that passes these criteria. We can then take those companies and do further screening or analysis in order to find where to invest your money.
To buy good stocks, of course. More seriously, to invest well. Why do we invest? We could just take the returns offered us by index funds, and forget about all this hard work. But we invest anyway. Do we do it because it's fun, or because it helps us learn about the world, or because it makes a nice hobby, or because we can beat the market. Probably all of those things.
When we buy stocks, and sell them, we typically have a process (or we should). It might be as elaborate as combing through all the SEC filings, calling investor relations, checking with all the suppliers the company uses to see what their reputation is, attending all the trade shows in the industry, maintaining a set of people to check store traffic, etc. It probably isn't. Mine sure isn't. I don't have time for all of that.
We all have to use what time we have carefully. I know for a fact that I don't want to spend my time doing the following:
Finding and tabulating ratios of interest.
Checking the same criteria over and over again to see if these are stocks I want to invest in.
Making the same mistakes over and over again.
Trying tickers at random.
Working with intricate Excel models that have to be tweaked for every stock because they aren't generic enough.
Getting, cleaning, and formatting the data for said Excel models.
Making the same mistakes others are making.
Others may vary, but I know I personally don't want to spend my time doing that. Instead I'd like to spend my time:
Getting feedback on whether the ideas work, or not.
Improving the ideas.
Executing the ideas, once they are good enough.
How about four? These screens aren't real screens that you would use in real life; they are more like building blocks. For one thing, they match hundreds of positions. For another, they do no filtering. They are designed to be simple, and demonstrate the point, rather than be invested on.
Here we buy stocks that have smaller price movements than the market.
To be precise, our analyst (the stock screener) will only return stocks that are in the bottom half of the standard deviation of one day returns. That mouthful basically means that these stocks go up less than their peers, and go down less than their peers. Of course, there could be more small ups than downs. Or the lack of large downs could matter more than the lack of large ups. We'd have to dig in to see what was going on.
Here we want firms with more operating cash flow each year – for four years. A Piotroski score rounds out the screen, getting rid of companies in trouble and therefore likely to go bankrupt.
Here we see that slow and steady wins the race.
Value screening is the practice of taking stocks that are undervalued, and hoping that they will do better.
Rather than buying good companies, you buy bad ones. You just want companies that are less bad than their price indicates. This works well in a market of stock pickers – and less well when the market is being driven by people fleeing overpriced bonds, or piling into overpriced tech stocks. Anyway, over time, value investing has outperformed. Just not recently.