Recent stock market action tells us that market
players might be getting around to considering fundamentals such as
valuation and earnings growth prospects when picking stocks to buy.
If you’re in that camp, today I’m going to describe
how you can use the free and user-friendly finviz stock screening
program to find undervalued stocks with strong earnings growth
prospects, which should be a winning combination.
Getting Started With finviz
Start from the finviz homepage (finviz.com) by
selecting Screener. finviz uses “filters” to search for stocks
meeting your selection criteria. Select “All” on the Filters bar to
see all available screening choices. We’ll start by defining our
Specify “USA” using the Country filter to limit your
list to U.S.-based stocks. Next rule out the riskiest plays by
specifying “Over $10” for Price, and “+Small (over $300 million)”
for Market Capitalization, which is the value of all outstanding
Many investors assume that low-priced stocks (below
$10) offer higher profit potential than more expensive stocks, but
I’ve found that the opposite is true. That is, holding higher-priced
stocks typically generates higher returns than owning cheaper
stocks. Same thing for market capitalizations. Holding bigger
companies is typically more profitable than small firms.
Isolate Value Priced Stocks
The Price/Earnings Ratio (P/E), which is the recent
share price divided by the last 12-months’ per-share earnings, is
the most widely-used valuation gauge. However, per share earnings
often fluctuate significantly from quarter-to-quarter. Quarterly
sales, on the other hand, are usually a steadier number.
Thus, the Price/Sales (P/S) ratio which is the recent
share price divided by the last 12-months sales per share, is a more
reliable valuation gauge than P/E. Value-priced stocks should be
trading at price/sales ratios below two, so use the “P/S” dropdown
menu and specify “Under 2.
Pick Most Profitable
Return on Equity (ROE), the most widely-used
profitability gauge, compares a firm’s earnings to shareholders
equity (assets minus liabilities). All else equal, higher ROE firms
are the most to surprise on the upside at quarterly report time.
Specify “Over 15%” for Return on Equity to limit your list to the
Drives Share Prices Up
Share prices typically track per-share earnings more
than any other single factor. Use the EPS Growth Next Year filter
and specify “Over 10%” to limit your list to firms that stock
analysts expect to chalk up strong numbers in that department.
Follow the Smart Money
Institutional investors such as mutual funds and
banks have access to information that we never see. Specify “Over
80%” for Institutional Ownership and “Over +5%” for Institutional
Transactions to assure that these big players are still adding to
already big positions in the stocks on your list.
My screen turned up four candidates: Alliance Data
Systems (ADS), Enova International (ENVA), International Money
Express (IMXT), and Lithia Motors (LAD), Use this
link to see which stocks the screen is turning up today.
Consider the stocks listed by this screen, or any
screen for that matter, as research candidates, not a buy list.
Do your due diligence. The more you know about your stocks,
the better your results.