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Find the Best Stocks to Invest In By Screening For Stocks

One investor's top stock pick is another investor's worst nightmare.  Indeed, if all investors agreed that there was only one top stock to invest in, then there would be no stock market at all.  It's a good thing thats not the case.  And lucky for you, because of all the technology and free screening websites, it is relatively easy to do your own stock screening and pick the best stocks that fit your portfolio and strategy.  Here are a few steps that we use when we look for new stocks to invest in.

Define the type of stock you want to invest in.  The first thing you need to is decide what kind of stocks you want based on your portfolio goals.  Are you looking for: growth stocks, value stocks, dividend stocks, large cap, small cap, micro cap, penny stocks, international stocks, stocks in a specific industry?

Turn your definition into screening attributes.  Now it's time to translate the stock type you are looking for into attributes that you can screen.  For example, if you are looking for growth stocks, you'll want to screen 1 and 5 year historical and estimated future sales and EPS growth.  If you are looking for dividend stocks, you'll want to screen for dividend, dividend yield, historical dividend growth rate and payout ratio.  If you are looking for large or small cap stocks, you'll want to screen for market cap, enterprise value and sales volume.  If you are looking for value stocks you'll want to screen for price to earnings ratio, both historical and projected, as well as price to sales and price to book value.  If you want stocks that fit into multiple categories, choose screens that will match your criteria.  For example, GARP (growth at a reasonable price) stocks could be found by screening for high growth and low PEs.  Also, you could look for high growth dividend stocks by screening for dividends and high growth.

Find a stock screening website.  There are thousands of stock screening tools and websites out there.  NONE of them are perfect.  None of them have all of the attributes you'd like to search on, and some of them that do have the attributes often are left blank.  For example, if you are screening for future 5 year growth estimates, it would require that an analyst publish that statistic.  Since many stocks don't have analysts and many analysts don't forecast 5 year growth, it would be a difficult field to screen for.  With that said, we tend to stick with the large, well known screening tools like Yahoo Finance, Google Finance, and even your broker's tools.  Check around, as there are literally thousands of screeners, and find one you are comfortable with.

Run your stock screen and download the results.  Start with a very broad stock screen so you don't miss any potentially good stocks.  And remember, the criteria that you screen on will not always reflect the company's potential.  For example, if you screen on historical earnings growth, a company that had a large write off or charge against earnings would show up as negative or very little growth.  And if you are screening on PE (price to earnings), a company that has just started generating profits could look very expensive because of the low earnings.  In other words, be selective in the criteria you screen.  Run dozens of screens until you feel like you've developed an understanding of the screens' results.  We would even recommend running several screens on different criteria, in case a good company is left off a screen because of a special circumstance or abnormality.  When you've finished your screens, download them into a spreadsheet.  You can easily download screens using CSV files and, if you don't have spreadsheet software, go to and you can get it for free.  One important note:  When you download the data, make sure that you download as much company data as you can.  For example, if you are screening for high growth based on historical EPS growth, make sure you download all of the other attributes that can help you narrow your list.  In this example, we'd recommend downloading future 1 and 5 year EPS and Sales growth estimates, company description, last 12 months and next years PE, market cap, sales, average analyst price target and any other growth related attributes that are available.

Sort your stock screen by your most important attributes.  Put all of your screens into one spreadsheet. Now that you've got a huge spreadsheet list of stocks, make a copy of the original and begin your sorting.  Sort the list by each of the attributes you think are important.  Then take the top 10 - 50 stocks and copy them to a new list.  Do this for each attribute so that you don't miss outlier stocks.

Briefly evaluate each stock based on its attributes and shrink your list.  Take this smaller list and look at one stock at a time.  Make an evaluation based on all of its attributes to see if deserves to stay in your stock screen results.  Delete the companies that don't meet most of your criteria.

Further investigate the stocks on your list.  Your list should be down to a reasonable number of companies at this point (maybe between 50 and 250).  Now its time to individually investigate each stock.  Go to your favorite finance website (like yahoo or google finance) and plug in the ticker.  Then take a long look at all of the fundamentals of the stock.  Start by looking at the description to see if its even a company you'd consider.  Then, look at the historical financials, their performance versus prior expectations, their historical price charts, analyst estimates, price targets and future projected growth rates.  Then read some of the press releases to see what others are saying (not that they are right, but they will give you some insight as to the current sentiment surrounding the stock).

Create a watchlist of stocks that you are interested in.  When you find a stock in your list that you feel has potential, put it on your watchlist.  Create your watchlist on your favorite stock website so that you can monitor it from anywhere and update it as things change.

Monitor the stocks you like and wait for a buying opportunity.  Now that you've got a list of your top stocks to invest in, monitor them for a while.  Read the news each day for the stocks you're watching and see how they perform during earnings season.  Watch to see if they outpeform and how they react during market swings.  Get familiar with them and start to feel which stocks have the most long term potential.

While monitoring the stocks, look for new stocks to add to your list.  While you are looking for the best stock to invest in, make sure and add new stocks to your list while you are doing your research.  For example, when reading articles about one of your watchlist stocks, take note of the other stocks mentioned in the articles and investigate them to see if they are worthy of inclusion into your watchlist.  Continually monitor and update your watchlist with new stocks and by removing stocks that no longer meet your criteria.

Invest in the top stocks from your stock screen.  During this process of evaluation, start buying shares in the stocks you like.  You can start by buying small positions at set intervals, or you can wait for pullbacks or other events to start buying.


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