I'm a confessed Fool for stocks, so you're very unlikely to hear me complain about investing. But I'd be remiss if I didn't tell you there's one really big problem with the art and science of stock picking: There's no universally agreed-upon method for finding great investments.
That can drive a rookie crazy. Imagine for a moment that you've never shopped for a car before. Then, on a lark, you walk into a dealership. Dozens of vehicles are before you. Which should you buy? The premium sports coupe? The family-friendly minivan? The highway-hogging muscle car? You have no idea.
The problem with too many choices
That's how it is with stocks. Market-beating returns can be had with growth stocks, value stocks, foreign issues, dividend payers, or small caps. As an investor, it's your duty to learn the strengths and weaknesses of each strategy and then pick one or more that fit with your time and temperament.
How? I'll address that in a future column. For now, I'm assuming that you know what you ought to invest in and why. Because even then, it's not so easy to get started -- you have to know where to look for stocks to buy.
Apply a stock screen
That's where a stock screen comes in. What's that, you ask? It's a database that searches thousands of stocks to find what you like best. From financial dictionary Investopedia:
"By using a stock screening tool an investor is able to follow a strict set of criteria that he or she requires prior to investing in a company. For example, an investor could screen stocks by entering the following criteria: 'listed on the NYSE,' 'in the telecommunications industry,' 'has a P/E ratio between 15-25,' and 'has an annual [per-share earnings] growth of at least 15% for the past three years.' The screener would then produce a list of stocks that displayed all of these attributes...The stock screener has replaced many days' worth of research with a few clicks of a mouse."
You set the parameters; the screen tells you which stocks may be worth your while.
A live screen test
Ready to try it? There are several good screeners you can buy. Among the best are Reuters' PowerScreener and Stock Investor Pro from the American Association of Individual Investors. Here at the Fool, we use Capital IQ, which is a professional-grade tool offered by Standard & Poor's.
But these options cost money. As a beginner, you may do best sticking with what your broker provides at its website or, alternatively, free options from Yahoo! Finance and MSN Money.
For this story, I went with MSN's deluxe screener, which requires Windows and free registration at the site. Plugging in most of Investopedia's criteria gave me 25 candidates for further study, including News Corporation (NYSE:NWS), Nordstrom (NYSE:JWN), Polo Ralph Lauren (NYSE:RL), and China Mobile (NYSE:CHL).
Follow the money
That's a good list. Just remember that these screeners (links below) are never perfect. You'll have to go beyond the numbers to understand how each business you invest in makes money and, thereby, funds future growth. Otherwise, you may get saddled with the nextWorldspace (NASDAQ:WRSP) rather than the nextApple (NASDAQ:AAPL).
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Worthwhile stock screeners:
- Reuters PowerScreener
- Stock Investor Pro
- Capital IQ
- Yahoo! Finance HTML screener
- MSN screener
Fool contributor Tim Beyers, ranked 1,001 out of more than 21,600 in the CAPS investor-intelligence database, writes weekly about personal finance and investing basics. Have a Foolish money tip? Tell him.
Tim didn't own shares in any of the companies mentioned in this story at the time of publication. All of Tim's portfolio holdings can be found at his Fool profile. His thoughts on growth stocks, Foolishness, and investing in general may be found in his blog. Yahoo! is a Motley Fool Stock Advisor recommendation. The Motley Fool's disclosure policy screens out Wall Street's losers.
