Wednesday, June 2, 2010

The Stock Screener: How I Found My True Religion

Several months ago, I reviewed my portfolio and realized that I had only mid to large-cap stocks, stocks like Google (Ticker: GOOG, current market cap of $154 billion), Garmin (Ticker: GRMN, current market cap of $6.39 billion), First Solar (Ticker: FSLR, current market cap of $9.14 billion).  Peter Lynch, the legendary manager of the Fidelity Magellan Fund in the 1980s, advised buying small-cap stocks (< $1 billion in market capitalization) because of their growth potential.  The idea is that small businesses can growth exponentially much more easily than large companies can.  Take Starbucks for example. Before they had a store on every street corner in North America, there were times when it could grow its business by just doing simply that, opening a new store on the next street corner.  By opening a new store, new revenue can quickly be obtained (assuming the business is managed and run successfully).  Now that Starbucks is everywhere, they have to find creative ways to grow their business, like expanding into untapped, international markets, which may or may not be ideal markets.

So, I decided to search for a small-cap stock for my portfolio.  Yahoo Stock Screener came to the rescue.  A stock screener is simply a filter for stocks.  You can filter out the stocks based on certain criteria, such as market capitalization and P/E ratio.  Yahoo gives you two versions of their screener, the first being a fairly extensive Java-based application, and the second is just a simple HTML-based screener.  I always use the Java-based one because it gives you way more options and is less clumsy than the HTML-based one.  That said, the HTML-based screener will still work.

You guys are quite smart.  So, I will spare any instructions on how to use the screener.  So, what should we screen for?  There are several criteria that Rule #1 investing requires.  The following were my criteria:

  • Market Capitalization ≤ $1 billion
  • Return on Equity ≥ 10% (Rule #1 requires 10% Return on Invested Capital; the screener didn't have ROIC, but ROE was the closest thing)
  • Sales Growth Est Next Year ≥ 10% 
  • Earnings Growth Past 5 Years ≥ 10%
  • Earnings Growth Est Next 5 Years ≥ 10%

It's not exactly a Rule #1 screen, but the point of this exercise was not to come up with a perfect filter.  Rather, we wanted to get some fresh ideas for stock picks.  If I were to run the screen today (June 2, 2010), I would get 52 matches.  Considering there are several thousand publicly traded companies in the US, that's not too bad.  The next part gets a little tedious.  You actually have to go through each one and determine if you want to research further.  By clicking on the symbol, the screener will take you to the Yahoo Finance page of that particular stock.  I like to look at the "Profile" of the company first to see if it interests me.  It gives you an idea of what the company does.  Then, I would go through the "Key Statistics" and "Analyst Estimates" pages to get an idea of where the company is at right now and where it is headed.  Since my portfolio was weighted heavily towards tech, I would skip over any tech companies.  I also didn't like financial companies when I ran the screen.  So, I would skip those as well.  Lastly, I would bypass any pharmaceutical companies because of the ethical risks that are involved.

I don't recall exactly how I ended up looking into True Religion, but I did, after going through a handful of stocks that were produced by the screen.  Perhaps the word "religion" piqued my interest, or maybe I've seen someone wear a True Religion t-shirt before and made the connection.  The important thing is that the more I looked into the company, the more attractive it became.  Thus, I ended up being a shareholder!  There you have entire journey of finding True Religion has been documented in this blog!  Be sure to read the other True Religion posts by clicking on "TRLG" label on the right.