How To Screen For High Quality Stocks

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The hardest part of investing is getting started. Perhaps you’ll find that this short story resonates with your experience.

Maybe you read a compelling investing article or you watched a video about the potential returns you are missing out on. Regardless of the medium, most of us are drawn to investing by the potential benefits promised. Whether we read, watch or listen to advice that compels us to finally get started, that momentum or optimism quickly fades when we are faced with making our first actual investment decision. Or, if you have no trouble getting started, perhaps in a month or two you begin to question or second guess some of your investment choices. Am I making the right choices? Should I be investing in this specific stock? Am I following the right advice?

I found that when I began my journey I had more questions than answers and many lessons were learned at the cost of capital. Fortunately for me, like many young investors I wasn’t operating with much capital at the time, and the blunders didn’t cost me dearly.

What I found most helpful along my journey was simple advice and free resources that allowed me to refine my process. To pay it forward, I want to share with you a simple FREE screening tool you can use to find high quality stocks to review for inclusion in your portfolios.

Here’s the link: screener

And here’s a brief summary of how I use it, to get you started.

The finchat screener is pretty simple but it is quite robust in the quantity of metrics you can filter for. The main screen gives you 4 areas to populate: Countries, Industries, Exchanges and Screener Criteria.

The Countries, Industries and Exchanges are pretty self explanatory.

The real treasure of this screener lies in the Screener Criteria, with over 240 unique metrics to choose from. This many options can be overwhelming so let me tell you which metrics I like the most.

Here are the 4 metrics I like if you’re looking for high quality companies.

1. Return on Capital Employed

2. Gross Profit Margin

3. Return since inception (CAGR)

4. Revenue 5Y CAGR

I personally screener for: Return on Capital Employed of at least 20%, Gross Profit Margin of at least 30%, a Return Since Inception (CAGR) of at least 12% and a Revenue 5Y CAGR of at least 5%.

The objective is to find companies that are growing their revenue, that turn a good portion of that revenue into profits, that are able to reinvest that capital to generate robust returns and have a track record of success.

To make the list of chosen stocks more manageable its best to filter for exchanges that are available to you. For me in the United States I like to filter out stocks that trade on the New York Stock Exchange and the Nasdaq Global Select exchange. You may want to choose exchanges that are available to you through your brokerage. These 4 filters, plus the exchange filter, currently show me 121 companies that I can investigate further.

If you’re a dividend investor, here are 3 additional metrics you can use to further narrow down this list.

1. Dividend Yield

2. DPS 5Y CAGR - this is the dividend growth filter

3. Payout Ratio

I set these filters to: Dividend Yield of at least 0.01%, DPS 5Y CAGR of at least 5% and a payout ratio less than 80%.

These 3 additional filters further narrow down the list of chosen stocks to just 55.

Just because a company passes these filters does not mean its a great stock. But the benefit of running a stock screener is that the odds of you finding a great stock to invest in, increase significantly opposed to randomly looking for stocks anywhere else.

Along my investing journey I stumbled through many stock screeners, some better than others. What I found to work best, was to keep the filters simple, to make sure they make conceptual sense and to not take the output at face value (do your due diligence).

Becoming a better investor is a multi step process, screening is a good first step to take. From there you can progress to learning how to review businesses, value stocks and build a quality portfolio.

Hopefully you find this stock screener beneficial and it can help you find your next great investment idea.