Boot Up, Log On, Start Picking
Every stock you buy seems to head south, but darn if your neighbor isn't making some snappy profits. What does he know that you don't? Perhaps how to trawl for good stocks on the Internet.
We're not recommending chat boards and touts. Many financial Web sites have sophisticated stock screens that let you select search criteria--such as company size and price-to-earnings ratio--so the site can then spit out a list of stocks to fit your requirements.
Want to give it a try? Here are some tips.
-- Learn by example. Start with the sample screens available on many sites. A good, simple one is at Quicken.com--and it comes with a helpful tutorial, too.
Before you try to construct your own screen, study what criteria the pros use. For example, Quicken.com's "Popular Searches" section offers several generic screens, from small-cap value to large-cap growth. The major criteria for both are market capitalization--that gets you the size factor--and a series of price ratios: price-to-earnings, price-to-sales, and price-to-book. When these ratios are relatively low, you're looking at value stocks; if high, they're usually growth stocks.
Check out the other criteria displayed, especially the three-year income growth and three-year sales growth rates. For the value stocks, they're sometimes very low or even negative. That's because value stocks are cheap for a reason--often, sales and earnings have been sporadic or volatile. With the growth screen, those same columns show strong double-digit gains. That's what merits their high p-e's.
-- Customize the screens. Price-earnings and earnings growth aren't the only important criteria, and perhaps market cap isn't even a concern to you. The screeners allow you to search on dozens of variables. Look at return-on-equity, or what profits a company is earning on the equity invested in the business. In general, the higher the better. But not always: The company could be pumping profits by loading up on debt. So some investors prefer return-on-assets. That calculation lets you compare the profitability of companies that have different ratios of debt and equity.
-- Watch what you mix and match. In the stock market, some things don't go together. You're unlikely to find a company with a 50% earnings growth rate selling for a p-e of 6. Or if you specify that the stock must have a $100 billion market cap, don't ask for a 50% growth rate. Some criteria are mutually exclusive. Including one will eliminate any hope of finding a stock that meets the other.
-- Don't be too demanding. You can get carried away loading lots of conditions into your screen. Your search could get so restrictive that you wind up with nothing. Four or five criteria are plenty. Some of the key measures are market cap, p-e ratio (or p-s if you don't trust reported earnings these days), earnings growth rates, and--for income-oriented investors--dividends and dividend growth rates.
The price-earnings growth ratio, or PEG, is useful for both value and growth investors. When it's below 1, you're likely getting whatever growth the company has at a good price. With growth stocks, the number may be higher, but you can compare it with other growth stocks to see if the price is still reasonable.
Of course, once you've completed the screen, all you have is a list of potential investments. You still need to do fundamental research. You will want to find out what professional analysts are saying about the stock and check the company's Web site and the Securities & Exchange Commission for its financial and corporate reports.
To dig deeper, you may have to pay. Both Multexinvestor.com and the finance section of Yahoo.com sell analyst research for $5 and up. Standard & Poor's (spoutlookonline.com) and Value Line (valueline.com) provide analysis that's free of investment-bank conflicts.
With some hard work, a little luck, and a knack for stock screening, who knows? Before long, you could be bragging to your neighbor.
By Carol Marie Cropper