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3 Ways to Use Stock Screens to Your Advantage

By Motley Fool Staff – Apr 30, 2018 at 2:10PM

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This important tool can put focus and purpose behind your investing research.

In this Industry Focus video, Vincent Shen and senior Motley Fool contributor Asit Sharma dive deeper into the process of using online stock screening tools. Over time, screening equities with purpose can lead to better investment results.

For our discussion on three big-picture strategies for running stock screens, simply click below.

A transcript follows the video. For the full episode, click here.

This video was recorded on April 24, 2018.

Vincent Shen: Before we move on and start really getting into the nitty-gritty here, I want to address an important caveat, and that is knowing what you want and what your objectives are as an investor, because that's important to determining your stock-picking strategy, not surprisingly, and what the screen process will look like for you. There's no requirement to know exactly what kind of investor you are for screening to be useful, but it does help to have those high-level goals cleared away. Older investors might be focused on dividends and income, and they'll be attracted to different stocks and use different screens compared to a growth investor, just as a value investor will have their own set of criteria and needs.

Personally, screens help me push out of my so-called comfort zone with companies that are outside of The Motley Fool universe, where a lot of my work is focused. But I'll pose this question to you, Asit -- how do you use screens personally?

Asit Sharma: I very much use them, Vince, in the sense of confirming what I'm already interested in. I'll go through three primary reasons that I use these, and then I guess we can talk about different metrics and ratios.

But first, I want to say something directly to Eric. Eric, thank you, because what Vince left off when he read your question is that you thought dozens of listeners, some of the other of dozens of listeners, also had your question. And I think that's great. That's a hashtag that's associated with Market Foolery and some of the other Motley Fool podcasts. They happen to have dozens of listeners, and you have just confirmed that on Industry Focus, we also have dozens of listeners. I thought that was really cool, and I appreciate that you are one of those dozens.

Myself, I have a certain worldview of looking at stocks. I like three things. I like to see rising revenue, rising earnings, and rising operating cash flow in a company being generated all at the same time. And I like to see that over long periods of time. If you compare me on a spectrum to other investors, I may be a somewhat aggressive investor but not a hugely aggressive investor. Coca-Cola is an example of a company that I've liked for a long time. McDonald's is another. These are actually very big names. Everyone knows what they produce and what their basic investment thesis is. But I like to look at their financials and confirm that, "This company, X, can do all three things at the same time."

So when I go to a stock screener, those are three parameters I'll usually start with. Then, I can add on other things I'm interested in. Maybe I think a company is undervalued, so I want to look at its valuation. Or find a company that I'm not familiar with that's flying below that radar, so I'll set a valuation parameter or filter to a setting which shows companies that aren't valued very highly by the market but also have those three other characteristics I had talked about.

That's the first way that I go about looking for new stocks, based on my investing personality. Everyone's investing personality is different. If you know yourself, you're more likely to pick up great companies that you can be comfortable with later on. It's important to try to look in the mirror and really know, long-term, when I buy a company, what am I comfortable holding for a long period?

Second, hunting down a specific idea. We talked several shows ago about Pool Corporation, which is something I pulled off a screen, just wondering, "In this mid-cap universe, or mid-capitalization stocks, or small-capitalization stocks, to go even lower, are there companies that are growing really rapidly?" Because a lot of times on Industry Focus, we talk about big names like Nike, Starbucks, Walmart. Just setting a market capitalization filter, so "Let me find a stock that's below $10 billion in market capitalization, combined with other characteristics," pulls up new stocks that I'm not familiar with.

The third way that I use screens is element of surprise. I like to be surprised. I think we all do. Screens, when you start to use them regularly, you'll see these companies which provide them throw in a bunch of different metrics and ways that you can find companies that you may not be familiar with. So, I like to tinker with the parameters when I go to a stock site that offers a screen. We'll talk in a moment about some very popular ones that we think are good for listeners and happen to be free. So just playing around, tinkering, looking for what surprises you, is a way to learn about the market and to learn about stocks you're not familiar with, to learn about sectors and industries which you may not be familiar with, and as Vince says, could be out of your comfort zone.

Just to recap: look for companies that conform to my personality as an investor. No. 2, I like to hunt down specific ideas. And No. 3, I like to play around with the screens to both learn about the market and find great stocks that I might not have found using the typical parameters that I'll set and are used to using on these screens.

Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike and Starbucks. The Motley Fool recommends Pool. The Motley Fool has a disclosure policy.

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