With thousands of stocks trading on the markets, you might find the idea of going through each stock and conducting a thorough analysis overwhelming. In our previous letters, we emphasized the importance of careful research, but doing this manually for every stock is simply impractical if not impossible.

Thankfully we can narrow down our search using a stock screener. Think of a stock screener as a powerful search engine designed specifically for stocks. It is a tool commonly available on financial websites or brokerage platforms that allows you to filter the entire market based on specific criteria you set.

Instead of manually researching countless companies one by one, you define the characteristics you are looking for, such as quality criteria, valuation criteria, size criteria, etc. The screener then does the hard work for you. In just seconds, it scans a vast database of stocks and presents a refined and manageable list that meets your parameters. This makes the investment research process more efficient and helps you identify potential target opportunities that align with your strategy.

Stock screener

Stock screeners are essential tools for investors to filter stocks based on financial metrics, valuation ratios, and growth criteria. They come in free (e.g.: Yahoo Finance, Finviz, TradingView) and paid (e.g.: Bloomberg Terminal, FactSet, GuruFocus and S&P Capital IQ) versions. For quality investing, focus on these key features: screen for metrics like ROIC, FCF yield, low debt/equity, Ability to check trends (e.g., 5-year revenue growth) and  reliable financials numbers.

Among the free ones (pay is always the last option), I particularly like Finchat, Koyfin, and Finviz. For the purpose of this exercise we will use Finchat screener that allows us to select from 300 different metrics to define our search.

A good screener helps you find high ROCE/ROIC/ROC, growing earnings, low-debt and cash-flow-positive companies. Valuation is also an important factor, but for this letter we’ll focus on the quest for quality companies.

YAIN Quality Criteria

Now that we have a screener let’s look at the characteristics a quality company should have. Here a non-exhaustive list of quality criteria that an investor should consider and focus on: 

Let’s start the quest

Unfortunately, whilst we like to recalculate everything manually, some of these metrics may not be available on the selected screeners. Hence, we may decide to use proxies; in fact let's say we want to find all the US listed companies that have: 

• 3Y Revenue  growth > 5%

• 3Y NOPAT Growth > 5%

• Gross Margin 5y average > 50%

• Operating Margin 5y average > 20% 

• Free Cash Flow Margin > 10%

• ROCE 5y average > 15%

• Quick Ratio > 1  

You would just need to filter by the country and then select the minimums and maximums for each of your metrics. 

and the screener will spit out all the companies that fit the above criteria: 

You’ll likely recognize many high-profile names, which is no surprise considering our search metrics. You should now play with different regions, different criteria, explore new criteria, adjust the metrics and check the results!

Screening is only the starting point

A stock screener efficiently eliminates about 99% of listed companies, giving you a focused research starting point. This is only the beginning. Furthermore, remember that screeners rely on reported data which can have lags, and they can't capture qualitative aspects like shifts in management quality or emerging competitive threats. The real work involves deeper analysis including examining financial health, evaluating durable competitive advantages, assessing management quality, and understanding industry trends. Screeners identify potential candidates, but only thorough due diligence reveals true investment opportunities. You must scrutinize financial statements, comprehend the business model, and evaluate long-term potential before committing your hard earned money.

Last but not least, don't forget valuation. Even exceptional companies require reasonable purchase prices to generate returns. We will explore valuation frameworks in future discussions. Stay tuned!