As the old saying goes, there are many different ways to skin a cat. Ask 20 people how they go about finding value stocks and you will get 20 different answers. Today, I will share with you how I go about finding value stocks. I don’t think this is the best time to buy stocks. Although I believe we will be seeing a rally in the markets over the next few weeks, I believe the DJIA is going to go below 12k in the summer, and head towards 11k, which will be the time when I buy stocks.
The criteria I use to screen for value stocks yields 17 stocks at this time. If the market falls to the levels I expect, this screen will yield many more stocks. I use Finviz.com for my stock screens. I love Finviz because it allows me to screen using both technical and fundamental analysis.
When you go to Finviz.com look at the top and click on screener. There are 4 tabs below that allow you to choose criteria for your screen (Descriptive, Fundamental, Technical, and All). I will go tab by tab for this screen to make it easier to read. If you don’t know what a certain criteria means, simply mouse over it and a bubble will pop up and give you a basic definition. I use five criteria to find value stocks.
First, I want a company that has average trading volume above 200k (under the Descriptive tab). My reasoning is, if a stock trades under this level, the company doesn’t have much of a following, therefore, it is too risky for me. If I wanted my screen to yield only companies that are very well known, I would limit my stock screen to companies that trade over 1 million shares per day. The problem with limiting my screen to greater than 1 million shares per day is I will miss out on smaller companies.
Criteria number two I use is a positive payout ratio. This means that the company pays a percentage of its earnings out to investors in the form of a dividend. Dividend paying stocks are generally less volatile than non dividend paying stocks, and when I look for a value stock, I want to find less volatile stocks. Click on the Fundamental tab for the payout ratio.
Criteria three is PEG ratio (Fundamental tab). PEG stands for Price to earnings to growth ratio. I could write an entire blog post explaining PEG ratio, but for the purpose of this article I will only note that the industry standard for a reasonable PEG ratio is under 1. If a stock is trading at a PEG ratio of over 1, it has extremely high expectations, and any misstep by the company in meeting or beating earnings expectations could lead to a stock crash.
Criteria 4 is Beta (Technical Tab). Beta is a measure of a stock’s price volatility. A beta of one indicates the stock is as volatile as a benchmark index, such as the S&P 500. We want a stock with a beta of under 1 because we don’t want to invest in highly volatile stocks. Sure, the high volatility stocks are the ones that are sexy, and can double in a year. But 99% of the time, those stocks are bad long term investments. In a recent post I showed a study that low volatility stocks outperform high volatility stocks.
Criteria 5 I use is 200 day simple moving average. Again, rather than confusing you with the definition of this criterion, I will simply say that stocks above their 200 day moving average are in some sort of uptrend. I want to see some sort of positive movement in a stock price before I invest in it. There is an old saying in the stock market “Never try to catch a falling knife”. If a stock is not in some sort of uptrend, it is a falling knife.
The result of the screen using the above mentioned 5 criteria is the following 17 stocks.
As I look through this list I only recognize 5 company names. I only invest in companies that I am familiar with. Wellpoint, Toyota, Advance Auto Parts, Kohls, and Bank of New York Mellon are the ones that I recognize. When the market gets to a level that I am comfortable with, I will likely buy one or more of these five stocks.