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Personal Business: Investing
SCREENING STOCKS ON YOUR PC SCREEN
Sitting at a computer, Christopher Pantaleoni patiently types in a description of what for him would be perfect growth stocks: companies with less than $500 million in revenues, returns on equity above 15%, average annual earnings growth of 18%, plus 10 other characteristics. The PC whirs for 15 seconds through data on more than 5,000 stocks before eliminating all but three.
Another Wall Street wizard tapping into his mainframe? Think again. Pantaleoni, a 49-year-old data-base programmer, is using MarketBase, a $345 software program, to run "stock screens" on a PC in his Newton (Mass.) home. Screens like this, he says, "open the eyes and mind to stocks I might not have known about otherwise."
GEMS. Thanks to the ongoing PC revolution, even little investors who aren't computer experts now are able to pick stocks as methodically as Wall Street pros. With the advent of screening programs, some available through such popular on-line services as CompuServe, investors can systematically sift through thousands of stocks in search of the most undervalued ones. For many investors, screening programs offer "a way to find the undiscovered gem that everyone else may be overlooking," says John Bajkowski, editor of Computerized Investing newsletter.
Although stock screening programs are generally getting easier to use, it still requires some dedication--and money--to master them. The better screening programs are still only slightly simpler to learn than a spreadsheet or data-base program. And most disk-based programs cost hundreds of dollars a year (table). Many on-line services charge users for the time their PC is hooked up via modem, so learning on-line can lead to hefty charges. Before logging on, users should study their manuals closely and become familiar with unique abbreviations for financial ratios, such as "5YREG" for five-year earnings growth.
If you need a road map, the American Association of Individual Investors frequently runs suggested screens in its monthly journal (312 280-0170). One AAII screen, for example, is designed to help investors determine whether companies can sustain their earnings growth. For $20, AAII also sells a "how to" kit containing 20 past articles on the subject. Boston financial analyst Dan DiBartolomeo recommends that seasoned investors check their library for financial periodicals, such as the scholarly Journal of Investing, to find investment theories they can use as screens.
TRADE-OFFS. On-line services enjoy a few advantages over disk-based programs, namely timeliness. While subscribers to programs such as Value Line's Value/Screen III must receive financial data by mail, on-line services generally update stock prices nightly and corporate data weekly. That ensures that most financial ratios are up-to-the minute. Getting data that quickly with software can cost as much as $2,000 annually.
What on-line services gain in timeliness, however, they lose in depth. They typically enable users to compare stocks in just a few dozen categories--usually such fundamental indicators as price-to-earnings ratios (p-e). Telescan is a notable exception; the service can screen stocks using 207 variables, including many technical indicators that track price and volume trends.
Users can generally get far more detail from disk-based services. MarketBase offers more than 100 categories for comparing stocks--double that of Value/Screen--and also lets investors weight each of these variables to their liking. MarketBase also tracks 5,600 stocks, more than three times what Value/Screen offers. But Value/Screen will appeal to followers of the investment firm's proprietary system for rating stocks by safety and growth potential. Unlike MarketBase, Value/Screen also includes Value Line analysts' projections for future earnings and returns.
Of course, picking stocks from screening hardly guarantees success. Numbers can be deceiving. Some financial ratios, such as profit margins and inventory turns, can differ dramatically by industry. What's more, some screens will
turn up companies that really do not belong. The simplest "growth stock" screens, for example, may capture mature cyclical companies that are advancing in their normal upturn. To prevent this problem, eliminate companies that have shown a recent loss or whose profit margins are out of kilter with their historical norms.
Experts caution that stock screening should be just the beginning of your research. Screening "is not a substitute for hands-on analysis," says Thomas Ebright, co-manager of the Pennsylvania Mutual Fund. "You still have to look beyond the numbers at the companies." Like Pantaleoni, Ebright runs screens to narrow down a long list of stocks to a handful, then does his own research to pick potential winners. To get started, you might try these simple screens:
-- SHADOW STOCKS: These are companies so small that their float and market capitalization aren't large enough to attract the interest of Wall Street analysts. The AAII suggests looking for companies with market caps of $20 million to $100 million, two years of growing profits, institutional ownership below 15%, and at least five years of reported data. Shadow stocks "may be an area where small investors have a better chance because they are underresearched," says DiBartolomeo.
Academics disagree whether shadow stocks, as a group, outperform the broader market. But investors can use shadow stocks as the universe for more detailed screens.
-- ONE UP ON WALL STREET: This is the popular strategy cited by former mutual fund manager Peter Lynch in the 1989 book of the same name. In his quest for undervalued growth stocks, Lynch looks for companies whose p-e is no more than one-half the growth rate. A word of caution: Running the screen could capture many companies with erratic, but improving, earnings. Bajkowski suggests you eliminate any company that has recorded a loss during the last five years. If the list is still too long, he also advises investors to screen out companies whose earnings and profit margins haven't risen over each of the last three years.
-- DIVINING DIVIDENDS: Some market experts believe conservative investors should focus on depressed blue-chip stocks whose dividend yields have risen to an unusually high level. If the dividend can be sustained, the stocks may be poised for a runup when the company's fortunes improve. To filter out companies that may cut their dividend, De Paul University finance professor Frederic Shipley recommends dropping companies paying out more than 60% of earnings. (The exception is utilities, which often pay out 75% or more.)
BUSINESS WEEK ran such a screen on Telescan, looking for Big Board companies with market caps above $2 billion, p-e ratios near their historic lows, and relatively consistent earnings over the last five years. Three of the top picks: Philip Morris, American Home Products, and Merck.
-- CANSLIM: This is the acronym for the theory popularized by Investor's Business Daily founder William O'Neil. O'Neil studied the 40-year record of growth stocks and isolated these common traits among successful ones: annual profit growth of 20%, five years of consecutive earnings growth, and some institutional ownership, but not more than 20%. O'Neil also looks for companies whose stock price is rising faster than 80% of all other stocks, a technical indicator known as relative strength. He further focuses on concerns with less than 25 million shares. CANSLIM works best on Telescan because, unlike other services, Telescan also provides technical analysis. But Value Line users can substitute the timeliness ranking for relative strength.
Critics caution that CANSLIM stocks can be risky in volatile markets, like today's, since market pros will crucify growth stocks that don't meet Wall Street's earnings expectations. That's further evidence screening offers no guarantee you will be able to outperform the market. But using screens to winnow a broad range of stocks down to a handful makes it easier to do the serious research that can lead to a pay-
Service Cost No. of No. of Comments
CompuServe $8.95/mo., 10,000 39 Improved, but hourly
800 848-8199 plus $23/hour charges can add up.
GEnie $8.95/mo., 12,000 50 Limited value. Can only
800 638-9636 plus $6 per screen run prepared screens.
Prodigy $29.90/mo. 5,000 8 Screens include CANSLIM,
800 776-3449 One Up On Wall Street,
and Shadow Stocks.
Telescan $295/software 8,000 207 Best on-line, but for
800 324-8246 $60/mo. soned investors. Thirty-
day trials, $44.
AAII Stock $100* 7,000 66 Good value bur requires
Investor whopping 15 MB of hard-
312 280-0170 drive space.
MarketBase $345* 5,600 100+ The best. Wall Street
800 735-0700 carry in their laptops.
Value/Screen III $325* 1,600 52 Includes Value Line
800 654-0508 rankings. Free demo
disk or $59 trial.
*Yearly costs for quarterly disks of updated financial data
DATA: BUSINESS WEEK
Dean Foust EDITED BY AMY DUNKIN