Stock Market Analysis Software

This article compares First Class Trader’s Fundamental Analysis Research Filter approach against typical Stock Screening methods. First, an introduction to Stock Screeners and some of the obstacles faced when using them.

Stock Screener / Stock Screening

A Stock Screener is a way of selecting stocks that meet a “strict set of criteria that he or she requires prior to investing in a company” (quote from Investopedia’s definition). For reference, an example of a free Stock Screener is the Yahoo! Stock Screener.

The main problem with using a Stock Screener is knowing what financial criteria to use and at what levels to set the screening limits.

Stock Screening Financial Criteria

The amount of different combinations makes it overwhelming for experienced investors. If your selected criteria is not thorough enough you may invest in companies that are performing well in some aspects but going backwards in others, which may eventually lead to their downturn. If your stock screening criteria is too comprehensive you will end up missing growth opportunities whilst waiting for the market to become under-valued.

Also, stocks may be identified by your Stock Screening criteria at inopportune times such as companies meeting growth criteria at the peak of their economic cycle or identifying under-valued investment prospects in an industry on a downward path.

Stock Screening Criteria Levels

Typical screening levels for each set of financial criteria are not well defined, especially for companies in different Industries whose financial structures can differ greatly. For instance, screening for companies with a low Price to Earnings (P/E) ratio will likely exclude most of the Technology sector. Including a high Return on Assets (ROA) percentage in a stock screener may focus on companies with little assets like consulting firms.

Based on the stock screening levels chosen you may miss out on lucrative investment opportunities if your filtering criteria is too strict or, alternatively, end up speculating from a large list of screened stocks.

First Class Trader’s Research Filter

The Research Filter will statistically rank each company against 30 financial performance indicators. Each financial performance indicator highlights a different aspect of financial health and when combined enable an overall financial assessment to be made.

Stock Screening with the Research Filter

The Research Filter was designed based on a comparative Fundamental Analysis approach but can be used to perform Stock Screening. Once you have added a list of stocks to the Research Filter all you have to do is sort a column with the financial criteria of interest and then remove all the companies that do not meet your chosen criteria levels. When applying for example P/E<15 you may be eliminating hundreds of possible investment opportunities (which is the point of a stock screener to narrow down your focus) however what about all the companies at a P/E of 15.1 or even 16? These companies may have an outstanding financial record in all other aspects however they will automatically be filtered out as an investment opportunity based on a single financial ratio. When you move on to the next financial criteria the chances of excluding other potentially lucrative investments based on a single financial ratio is becoming even more likely.

Outperforming Stock Screeners

It stands fair to reason, that if investing in a company based on a single financial ratio is not recommended, then conversely excluding a company based on a single ratio should also be avoided. In summary, stock screening can be a valuable tool however it should be used with care. The Research Filter will not exclude any companies based on a single ratio.

The statistical rankings of each of the 30 financial performance indicators will be used in an algorithm to determine financial health from which each company is ranked on a scale of 0-100.