As retail investing becomes more and more popular, free services and data sharing have also increased. This means that it’s quite easy to filter for value shares using different ratios online. But it still means that an investor needs to knows the screeners to add in. Here are the filters that I use.
What is a stock filter?
A stock filter is simply a way of sifting through the thousands of shares that I could decide to buy. Before I even start, I have to be clear if I’m targeting dividend, value or growth ideas. Once I’ve settled on my aim (in this case value), I can proceed.
As a disclaimer, all of the ratios used have the goal of providing me with a pool of relevant stocks to choose from. Yet I won’t simply buy without doing any company-specific research. There’s plenty that hard numbers can’t tell me about the state of a sector or the outlook for a business. So it’s important to note that the filters are a supporting guide, not a tool to make a blind purchase.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Two initial ratios
The first filter I use is to screen for ratios related to the share price. One is the price-to-book and another is the price-to-sales.
Both try to assess how the current price compares to either the revenue of a business or the book value. If it’s below a certain benchmark, the stock could be flagged as being undervalued.
The book value of a company refers to the net figure after taking away the liabilities from the assets of a firm. If the book value per share relative to the share price is below 1, it usually means the stock is good value.
If the price-to-sales ratio is below 2, again it could indicate a good purchase. This ratio highlights how much value the market assigns to £1 of revenue.
Watch the debt level
An extra filter I add is the debt-to-equity ratio. I think this is really important when trying to find value stocks. After all, a company might have a low price-to-book and price-to-sales ratio. But what if this is because the firm has very high debt levels? It would render the other two points useless.
A figure of 1 or less is considered good, with anything above 2 being a bit concerning. A low number shows me that borrowings aren’t out of control and shouldn’t materially impact the business going forward.
My end goal
With these three filters, I can aim to eliminate a lot of stocks that don’t fit my agenda. More than that, they should help me to find some bargains to buy. Even though I still need to do research, the screening helps to cut down on my time being wasted by looking at companies that don’t fit my value aim.
