Super Simple Stock Screening in less than 5 minutes
Your time is precious, so you need to learn how to spot possible winners.
Hi Everyone,
Investors have thousands of stocks available but not enough time to go through every one of them. They need a simple shortcut to know if a stock is worth further research. In this issue, I give you my step-by-step guide on how I pre-select stocks before I even read their quarterly reports.
Let’s say you read somewhere about a stock. In a Newsletter, on Fintwit, someone mentions it at a cocktail party, etc. For this example, we take a random stock: Quest Diagnostics Incorporated (DGX). Here’s what to do next:
Go to their homepage to the “About” section to get a quick overview of their business:
Alright, they operate in the healthcare sector and provide diagnostic insights. Disease treatment is inelastic (no cyclicality like commodity-related stocks) and has a long-term demographic tailwind. Looks interesting. ✅
Most investors focus on one question: “Is this a good/cheap stock?” I, on the other hand, take a step back and ask myself: “Does this stock belong to a group that tends to outperform over the long run?” Let’s take a look at how the healthcare sector as a whole has performed historically:
The average annual return over the last 10 has been 15.71%. ✅
Bonus point: This sector also outperforms the current inflation rate. ✅
Can’t complain about that. We are already choosing from a pre-selected group that has historically outperformed. Chances are simply higher that we pick a winner from a pool of winners than from a pool of losers.
Next, you go to the “Investors” section and check their recent press releases. To make it simple, you want to see good news. Let’s take a look:
While researching companies I noticed one uncommon feature that many of them have: Awards. No specific ones but general recognition for best workplace/best regional company/best customer relations and so on. Missing awards are not a bad sign, but if a company gets them it’s a good one. ✅
Next, we see that the company raised the guidance. ✅
And they take measures to accelerate growth and improve operational excellence. ✅
Remember, you want to see an evolving company, not a struggling one.
They don’t leave management succession to chance. ✅
Dividend raise. ✅
“World’s most admired company”. ✅
New cooperation with Walmart. ✅
When you read their press releases you get a quick intro to what’s actually going on with their business without spending much time on annual letters. Lookout for improvement. You get the idea.
So far, so good. Now, we are going to check the long-term performance of the stock:
What you want to see is linearity in one direction: UP
Not something like this:
One free tool for the financial overview that I use is roic.ai. They offer a good overview of most stocks and you don’t need to register:
While a deep dive requires much more time and some number crunching, we take a short glimpse at two things: Consistency & Growth.
Growing revenue per share? ✅
Growing earnings per share? ➖ (we see long-term growth, but not year after year)
Growing FCF per share? ➖ (same as with earnings)
Growing dividends? ➖ (same as with earnings)
No parabolic capital expenditures? ✅
Operating margin at least double digits? ✅
No significant jump in long-term debt? ✅
ROIC at least above 10%? ➖ (But a significant improvement in the last years)
ROE constantly at least 15%? ➖ (But again, significant improvement in the last years)
Last but not least we check the acquisition history. Google simply “Company name + acquisition history”. Acquisitions play a significant role in a company’s long-term success because they enable the management to buy knowledge/customers/patents/ competitors etc.
The first thing that comes to mind is that they had 18 acquisitions in the last 5 years (This might have something to do with their efforts to accelerate growth). Then you take a look at the sectors: Health Services and Life Science. You want a company that stays within its field of competence. ✅
That’s it for now. On the surface, this stock looks solid, with improving fundamentals since 2020, is worth a closer look and we can check their reports from that year on to see what management had to say. Repeat this quick process with 20-30 stocks and you should have a handful of interesting ones that are worth your time for deeper research.
For those who don’t already have it, use my checklist as an orientation for what to lookout for:
Hope you learned something today, until the next issue. 👋