The Features of A Good Screen

I mentioned screening in a previous post, so lets have a quick discussion on what makes a good screen:

  1. Data!
  2. A good spread of signals/ratios that are proven to work from the value, quality and momentum themes.
  3. Peer group comparison to help find  the best names in a segment.
  4. Industry or country aggregates to identify wider trends. (Mostly momentum)
  5. Short-term price indicators for good entry and exit points.
  6. Industry, country and other classifications, short description of each business.

With respect to signals, here are a few pointers:

  1. Within Value, cashflow is often the most reliable metric. However, one should not be overly reliant on any single line item. Therefore, earnings, sales and book-based metrics are complimentary. For financials, book value is preferable as cashflows is not available. Historical numbers are factual and more reliable, but there is a place for forward earnings (especially if they are falling). Dividend yield behave slightly differently as investors either chase or ignore this factor at various times. Avoid looking at everything through the value lens. Value is also directly fighting momentum so consider using an averaged price.
  2. Many quality metrics have been documented, they often relate to cash conversion, efficiency, investment discipline and balance sheet strength.
  3. Momentum refers to auto-correlation in prices and analyst forecasts. Typically, the less efficient the market, the stronger the effect is. i.e. not much in US mega-caps but strong in Asian micro-caps. Prices have some mean-reverting tendencies in the first few weeks, so ignore those for momentum calculations. For analyst upgrades and downgrades, the size of the revision matters less than the direction. Note: At times prices respond to analyst revisions and sometimes, analyst revisions respond to prices. *chuckle*
  4. Value and quality are often most relevant within a well-defined peer group. Momentum works across the entire market, which means that it’s also useful to look at aggregated momentum scores.
  5. The short term mean reversion of prices can be employed for better entry and exit points. Other technical indicators such as 52 weeks high/low or RSI (relative strength index) could be helpful too.
  6. A short business description can give a first impression of the business, it can also assist in finding specific keywords across many companies if you are looking for a thematic idea.
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