A unique methodology is used to screen for attractive stocks
The stock screens that are available in the market today allow you to screen for stocks based on standalone valuation indicators. For example, you could screen for stocks that have low Price to Earnings ratio, low Price to Sales ratio, low Price to Book ratio, etc.
The problem with using this approach is that you end up with several lists. If you screen for low PE stocks, you end up with a list comprising of Stock A, Stock B and Stock C. If you screen for low Price to Sales stocks, you end up with another list. Is Stock A, a low PE stock, really a good buy? You wonder because this stock is not on the low Price to Sales ratio list. That means it is not cheap judging by Price to Sales ratio.
Of course, the logical solution is to screen for stocks that are cheap based on PE and Price to Sales ratio and Price to Book ratio, etc. If we do that, we quickly find out that there are few or no stocks to buy, especially in this expensive market. And why must a stock be cheap based on all measures? A technology stock has little assets and yet is worth a lot because of its earnings power. These stocks would never show up on your screen if you require that stocks must also have low Price to Book ratios.
This problem can be overcome by screening for stocks using analysed rather than raw valuation data. This means that for every stock in the global investment database we would determine whether it is cheap or expensive based on the best combination of five valuation indicators – Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. After that, we only have one thing to screen for – stocks that are cheap.
This way we don’t have multiple lists to further spend time on to do qualitative research. And we don’t have the dilemma of deciding which list to choose from.
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