David outlines how he manages his investments and his preference for the tech sector
There are numerous high-quality screening tools available on the internet that can help you to spot opportunities in the market. These can quickly scan a vast number of shares to identify those that meet your preferred technical or fundamental criteria.
Most people who use these sorts of filters start with a fairly simple objective like identifying the highest yielding shares or the stocks with the most momentum, but you can easily build on this to come up with a much more sophisticated stock selection strategy.
Edward Croft, CEO of Stockopedia, says that stock screening is the fastest way to build a share portfolio with a good chance of beating the market as it uses statistics rather than stories to identify possible investments.
‘A portfolio built through a solid screening process can help to counter many of the behavioural biases that can afflict investors who use traditional word of mouth means to come up with ideas.’
If you have never used a screener before you might want to have a go using one of the free ones available on sites such as Shares’ sister service, MoneyAM, or FT.com. The latter allows you to create your own custom scans or use a pre-coded guru screen that is designed to replicate the approach used by successful investors such as Warren Buffett and Ben Graham.
Another interesting example is the ‘growth at a reasonable price’ screen that is based on the strategy used by Jim Slater. The scanner on FT.com identifies nine stocks that meet the various conditions including Andrews Sykes (ASY:AIM) and Berkeley (BKG).
Screening specialist
The web-based service Stockopedia has developed its own proprietary system of StockRanks to identify the key drivers of return so as to help detect which stocks are likely to perform the best. There are also 65 pre-programmed guru screens that mirror the techniques used by famous investors like Jim Slater and Warren Buffet, and a powerful screener where you can test your own selection criteria.
‘StockRanks help our subscribers to find good, cheap, improving shares. Every stock is scored as a percentile from 0 to 100 across their value, quality and momentum, as well as various composite blends of each,’ explains Croft.
It’s a system that has been highly effective at finding winners as the top decile of high StockRank shares in the UK market has returned 70% over the last two-and-a-half years. Over the same period the FTSE 250 was up 22%, while the FTSE 100 made a small loss.
A subscriber that wants to go beyond the more basic screening tools could try one of the multiple advanced ‘rule types’ like screening
by aggregates.
‘This allows an investor to compare the PE ratio of a company or other such metric against the median or average of the market or industry, or to search for companies within the lowest 20% of PE in their sector. These are much more dynamic rule types than using an absolute cut off like a PE of less than 10, which does not respond to changing market valuation environments,’ says Croft.
Stockopedia costs £25 a month for access to the UK database, although there is a free 14-day trial. Other markets are available for an additional fee.
Fundamentally sound
SharePad is an easy-to-use web-based service with a powerful stock screener that enables you to set your own parameters. These can be as detailed as you want and can include both technical and fundamental criteria.
Tim Clarke, general manager of Ionic Information, the company behind SharePad, says that screening is a quick way to find companies that meet specific conditions.
‘The speed of the search means that in a short space of time you can experiment with different settings until you generate results you are happy with. Screening also allows you to build investment strategies based on those of well-known investment gurus.’
It is hard to imagine a more comprehensive choice of filters as you can incorporate anything you want from the headline ratios and forecasts to individual aspects of the accounts, as well as technical indicators such as the moving average.
‘SharePad includes over 20 years of financial history, which enables you to filter for performance over multiple business cycles. You can also combine financial criteria with technical criteria such as new highs or lows, momentum, and price crossing moving average,’ explains Clarke.
Another unusual feature is that you can use the software to screen for funds, investment trusts and ETFs. One example would be to filter for the investments with the best performance over 10 years and the lowest fees.
There are plenty of more complex screening features if you want to try a more sophisticated approach. Many of them are described in the free articles on SharePad’s website written by Phil Oakley, a former analyst.
‘For example, rather than look for companies with a PE ratio below a certain value, or above a certain ranking in their sector, you could search for companies whose PE is lower than their five year average. This would give you shares which are cheap compared to their recent history,’ says Clarke.
SharePad costs £25 a month or £250 a year for 15-minute delayed UK and US prices. The live price service including Level 2 data costs twice this amount.
Proprietary research
The UniSearch feature of VectorVest UK allows you to screen 2,200 UK shares to identify those that meet your preferred criteria. You can either create your own scans or use one of the pre-configured combinations.
David Paul, MD of VectorVest UK, says that the secret to success in the stock market is to buy the best stocks and then manage them well.
‘The first step to success is to use one of VectorVest’s pre-written searches ? or write your own ? to find undervalued shares that are growing earnings both aggressively and safely. It is then a case of applying a trend filter to the shares found in step one.’
The program has what is known as a Comfort Index that automatically finds shares that are in the midst of a strong trend with little volatility and ranks them accordingly. Stocks with good fundamentals that are trending strongly can be very profitable holdings.
Investors who want to take it a stage further might be interested in Protrader, which searches for shares with good fundamentals that are experiencing a short-term technical breakout from key support and resistance levels.
‘Protrader allows the trader to find their favourite technical set-ups in an instant without looking through hundreds of charts. You can use one of the 38 in-built technical searches, modify them or build your own,’ explains Paul.
VectorVest 7 UK costs £5.95 for a 30-day trial including Protrader and is then £39 a month. Protrader has a one-time fee of $495.
Whatever software you use it is always advisable to back test each screen or paper trade it without risking any real money. This would give you a chance to refine the criteria before putting it into practice, although it is important not to overdo it as you want to be able to spot future winners rather than fit the data to the past.