Economics 104

Selecting Stocks with a Simple Screen (September 14, 2011)

The purpose of this homework is to show you how to use stock screener to search for stocks that meet your investing criteria. Suppose you are interested in finding technology stock that is small-cap or larger, that pays a decent dividend, has a PE ratio that isn't off the charts, sells for above $5, has a reasonable amount of cash on hand, is not saddled with heavy debt, and has seen decent growth in both earnings (net income) and revenues.

Go to the http://www.google.com/finance and select the link for the stock screener (found on the upper left of the home page). There you will find a default stock screener with a few entries. Play with it a bit to see how the sliders work. Make sure the default is set to "All exchanges" and "All Sectors." (We will override the latter later).

Remove the bottom criteria "52w price change" because we don't want to use that. Then, using the "Add criteria" button, systematically change the criteria and values to what is shown below. (MAX will be some huge value that you don't have to override if the criteria is "none."

Stocks that satisfy the screening criteria appear on the bottom of the page (and notice how the sliders shift as you manually add criteria). You will also note that when you add the criteria a pop-up will explain the criteria. Look at those when they appear.

Criteria	Min	Max
Market Cap	50M	none
P/E ratio	5	25
Dividend yield (%)	3	none
Last Price	5	none
5-year revenue growth rate (%)	10	none
5-year Earnings per Share gr (%)	10	none
LT Debt/Equity (recent year) %	0	20
Current ratio	1.5	none

If this is done around the time this was revised (September 2011) somewhere around 10 companies should pop up. Look at those.

Now narrow your selection to technology companies why changing the drop=down box at the top of the page from "All sectors" to "Technology." Again, if this was done around the time this was revised there should now be only three companies (possibly give or take one or two).

By now you should understand the importance of the revenue and earnings growth rate, the market cap, the dividend yield, the P/E ratio, and the last price based upon your reading and the lectures. We are clearly looking for a growth company (although we have a fairly moderate target for growth) that also pays dividends.

We also want this company to have a reasonable amount of cash on hand relative to bills that are coming due, hence the desire to have the current ratio above 1.5%

We have also decided that we want to avoid companies that are burdened with very high levels of long-term debt relative to their size as measured by their equity value. The debt obligations of companies with long-term debt are fixed and such companies are sometimes threatened when their revenues turn down in a weak economy. Debt payments are fixed, revenues are variable. That is why we accept LT Debt/Equity capped at 20%.

(After completing this homework you might eliminate all criteria except these two, then screen by different industries. You will get some interesting results. You will find HSR – High Shear Technology. What do you think?).

Summary of the criteria:

Market Cap: We want to identify Small Cap ($50 million) companies and above.

PE Ratio: We will accept a stock priced well below the S&P 500 average (13%) – maybe that’s why the reason the dividend yield is so high – but we do want a company that is still profitable and we don't want a company that is over-valued - hence the upper and lower range.

Last Price: We don’t want to buy a stock that may be threatened with delisting.

5 year growth rates (revenue and earnings) = We are very picky, we are looking for dividends but we still want to see growth in both of these areas.

Long-term Debt/Equity % - We don't want a company choking on debt or facing high annual debt payments relative to its size (although we could have chosen a level that this, which was conservative.

Current Ratio: This is the ratio of current assets to current liabilities. We want this ratio to be well above one because if not future dividends paid from cash might be at risk.

Results:

Of the three or four companies that remain. one of them makes products for athletes and others who want to know where they are or where they need to go or even how fast they are going. Go look at some of the other stats for this company.

Remember the name of this company for the first exam and remember the primary criteria whereby we chose it.