A lot of investors tell me they’re frustrated by all the recent stock market strength. Why? Because they got caught sitting on the sidelines and now feel as though it’s too late to buy in.
While I’ll be the first person to admit that many companies are no longer the screaming buys they used to be, I do want you to know that there are still plenty of reasonably-priced stocks out there right now. The trick is knowing how to find them.
As I’ve pointed out in this column many times before, stock screens are one of the quickest and easiest ways to start the process of searching for new buys.
In a minute I’ll show you the results of my most recent screen.
First, However, Let’s Recap How Stock Screens Work …
Stock screeners are filtering programs that draw on databases of stored information, allowing you to search for investments based on pre-determined criteria. They’re both extremely useful and fun to play with.
In the old days, it took a proprietary system and either lots of tedious labor or a very powerful computer to perform a single stock screen.
Now, things are a lot different. Sure, investment professionals still have access to programs and software that give them more information than most. But the Internet has brought screening to masses, and many of the online tools are as powerful as some of the pro-level stuff.
In fact, plenty of websites now offer advanced tools and rich data sources absolutely free of charge. For example, Yahoo! Finance has an interactive stock screener that encompasses more than 150 different criteria. I think it’s very impressive, and worth checking out.
Other sites have quality screeners, too. Zacks Investment Research offers up a custom screener as does Morningstar, which includes the company’s analyst rankings as one of the possible criteria. Morningstar also offers a premium screener, which is available by subscription only.
You should also check to see if your broker offers its own proprietary screening tools. Fidelity provides one to its customers, for example.
Okay, But What Criteria Should You Use?
Here’s the Most Recent Search I Did …
In the screen below, I limited my search to shares with dividend yields of 3.5% or higher — a bar that is much higher than the current market average.
Then to ensure that the dividends were reasonably safe I also insisted on a payout ratio of 65% or less. That means, in the worst case, one third of the firm’s earnings are still being retained for basic business needs.
Next, I weeded out any stock that was trading at a price-to-earnings ratio in excess of 16. Moreover, I also screened for five-year earnings growth of at least 5%. Together this means the companies below are both reasonably priced and showing healthy business gains.
And to make sure that none of the resulting names were loaded down with debt, I added one final criteria — a long-term debt-to-equity ratio of 50% or less.
As you can see, many of the names are lesser-known regional banks, which makes sense given the combination of characteristics I searched for. However, there are also plenty of non-financials — including Strayer Education, food distributor Sysco, and tobacco company Lorillard.
Now, I’m not saying you should rush out and buy any of these companies — a stock screen is just the first step in the research process.
But I CAN tell you that I recently recommended one of the companies above for my own dad’s retirement account. And I’m sure other names in this list are good buys right now, too.
So if you feel like it’s too late to put some stocks into your portfolio, I’d humbly suggest you just look a little harder … and stock screens are a great way to do that.
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