I have been playing around with Stockopedia's excellent filtering to try to find some safe value shares. I am more a growth/momentum investor and am not hugely comfortable in the value arena. Why? Because growth opportunities and momentum plays are easier to spot [for me] and value can be rather subjective.
Anyway, I set about thinking how about I might find value.
I started with Piotroski's idea of scoring stocks according to a set of accounting values and then picking those with low price to book value and a high score. Stockopedia has a screen for this and it currently has 17 shares on it. That's about 12 too many for me.
What next? Well, Altman came up with a checklist that attempts to filter out the chances of bankruptcy. I added Z score of greater than 1.8, his cut-off for financial distress.
I then decided to look for companies that have a low p/e, pay a dividend, have 2x both interest cover and dividend cover. Just to make sure the dividend part of the screen doesn't deceive, I look for a dividend growth streak of at least 1. Interest cover is a passing attempt to make sure any debt payments are covered. I don't screen for debt because it's difficult to screen good debt vs bad debt. Good debt is used to move the company forward; bad debt to save its skin!
A Market Cap £25m cut-off gets rid of likely illiquid stocks with wide spreads.
I still had too many stocks.
I added Beneish M score of less than -1.75. The idea is to filter out stocks that might be subject to a bit of creative accounting.
Lastly, I look for someone else to agree with the filter's analysis. I'm not a great believer in broker forecasts but that's what's on offer. So I look for at least one broker forecast, at least one outperform and the current price trading at least 5% below the broker price target.
Right now the filter throws up:
Cohort (LON:CHRT) (I hold) is a buy on the chart, Fenner (LON:FENR) is just off the bottom of a channel and…
This looks an excellent set of criteria - I can't question any of the criteria. It would be great if you could post a link to the screen page - as other subscribers will be able to watch the list over time. By the way we are considering adding the ability to 'publish' screens and track their performance over time in the same way we do for our premium models. Let me know if you'd appreciate that feature. We'll also be adding the ability to 'watch' different screens more formally so that investors can be notified of new qualifying stocks more promptly.
The fascinating thing about screening for value stocks is that sometimes its the most unusual stocks in a basket that do the best - it's often the oversold stocks that nobody wants to look at that actually bring the lions share of the reward. Joel Greenblatt found that investors who picked stocks from his lists of 30 magic formula stocks underperformed because they picked the wrong ones - the safe ones ! Of course if you have a highly concentrated portfolio, you can't find safety in numbers, you need to have high conviction that each stock won't disappoint - in that scenario it's definitely vital to weed out the danger stocks.
I'm going to take a closer look at these companies - I noticed that Fenner is also qualifying for our Naked Trader screen - which I believe is a strategy you have followed too?
