A Simple Tool that Uncovers New Investments
Want to know one of the best ways to minimize the dangers of market volatility and build long-term wealth?
Consistently putting more money to work.
One way to do that is through dollar-cost averaging, a strategy that invests a set amount of money into the same stocks or funds on a regular schedule.
Another (slightly less scientific) way?
Buying a new investment — or investments — every week, every month, or at least every so often.
Of course, the real challenge is finding new opportunities… especially when prices have generally run up like they have over the last several years.
Enter the stock screen, which allows you to quickly sort through thousands of stocks trading on U.S. exchanges, not to mention the many thousands of additional shares trading on foreign exchanges.
Stock screens are a great way to uncover new, off-the-radar investment ideas that meet whatever specific criteria you’re looking for.
These filtering programs draw on databases of stored information, allowing you to search for investments based on predetermined factors. They’re both extremely useful and fun to play with.
In the old days, it took a proprietary system and either lots of tedious labor or a very powerful computer to perform a single stock screen.
Now, things are a lot different!
Sure, investment professionals still have access to programs and software that give them more information than most. But the Internet has brought screening to the masses, and many of the online tools are free as well as powerful.
The more important part is knowing how to harness the power of these tools once you’ve found them.
Some sites offer a number of predefined searches to help get you started. But in my experience, the most interesting (and relevant) results are produced when you select the criteria yourself.
Let’s go through some basic items you might want to look for.
For starters, here are four fundamental items:
#1. A reasonable valuation — There may be no more important key to successful investing than buying at the right price. And while there are plenty of ways to define “value” there’s no simpler or more readily available measure than the price-to-earnings (P/E) ratio. The lower the number, the less money you’re paying for every penny the company earns.
#2. Great cash flow — Companies that bring in loads of cash are attractive. Simple, right? I often use free cash flow, which is the amount of money a company has after it pays all its normal costs of doing business (salaries, bills, capital expenditures, taxes, etc.).
#3. Low debt — You can use a company’s debt-to-equity ratio to tell you how much long-term debt it has. The higher the percentage, the more debt the company has.
If you’re very conservative, you can search for companies that have a total debt to total equity ratio under 20%. Heck, there are some companies out there that actually have ratios of zero, indicating no long-term debt at all!
#4. Solid profit margins — Simply put, this tells you how much of a company’s revenue becomes profit. It’s expressed in percentage terms… the bigger the number, the better!
If you’re after higher-growth companies, you might include — or substitute — other criteria.
For example, you could screen for firms that have posted five straight years of double-digit sales gains or that have doubled their profits in the last year.
And since I’m such a huge fan of dividends, I can’t help but mention three of my favorite criteria in that area —
above-average yields (as measured by a major index such as the S&P 500),
adequate dividend coverage from cash flows,
and strong dividend growth over a five-year period.
These are all good starting points, but I recommend adding additional qualifiers to get even more targeted lists.
For example, I often search within a particular sector, industry, company size, or region.
I then use those lists as a starting point for further research – digging deeper into the individual companies themselves. That means looking at everything from recent business developments to various stock charts.
My point is that stock screens shouldn’t be the sole step in your process. But they’re a great way to get interesting ideas with the kind of characteristics you want.
I encourage you to experiment and see what you discover on your own.
You can find investments that have strong momentum by specifying share prices that are at, or near, new highs.
Or, if you want to see what companies have confident managers, you can screen for large amounts of insider buying.
The possibilities are endless… the searches cost nothing… and the resulting information can prove very profitable.
To a richer life,
Editor, The Rich Life Roadmap