How to Screen for Winning Stocks

Transcription

1 How to Screen for Winning Stocks A Brief Guide to 9 Backtested Strategies By Kurtis Hemmerling Published by Kurtis Hemmerling at Smashwords Copyright 2011 Kurtis Hemmerling Table of Contents Message to Reader Market Screen: Market Timing Fast Stock Screen: Aggressive Dividends 1 Utility Stock Screen: Aggressive Dividends 2 - High-Yielding Stock Screen: Aggressive Dividends 3 ADRs Stock Screen: Aggressive Dividends 4 Value Stock Screen: AGGRESSIVE GROWTH: CANSLIM ON STEROIDS Stock Screen: AGGRESSIVE GROWTH: NASDAQ ROCKETS Stock Screen: AGGRESSIVE GROWTH: UNDER $10 MICROCAP Stock Screen: AGGRESSIVE GROWTH: 4 in 1 Getting Setup on Portfolio123 Message to Reader This guide is made to be a quick resource for running my top performing scans. They range from defensive utility type scans all the way up to aggressive high-growth stock screens. These are my custom screens and I am making them available to you at no charge. These scans you will read about here are summaries found in my books The Aggressive Dividend Investor ($2.99 Amazon) and Rocket Growth Stock Investing (99 cents Amazon). If all you want is the stock screening techniques for free, don t bother with the other two books.

2 Some of these scans are fairly complex. As such I required a sophisticated online stock screening platform that could handle in-depth fundamental and technical screening with rigorous backtesting capabilities. I found such a service with Portfolio123. They allowed me to create and freely share my scans with others. What I really love about Portfolio123 is that they have a free membership level which means that you can join and run all of my scans for free. It doesn t get much better than that. When you do sign up though, please enter in the invitation code HKURTIS. Not only does this give you a free 45 day trial on any membership level, but you can also downgrade your membership to the free one as your trial period winds to a close with the click of a mouse. The site is pretty awesome and is basically an institutional grade screener, backtester, simulated trading environment that does everything I could ever imagine. And if you do decide to go with a paid membership (zero requirement to do so), I get a couple of pesos that will keep me inspired to develop and freely distribute new trading strategies and ideas. Well, that s about all I have to say. This short book will be a down and dirty screening summary instead of the more wordy products I have already published. At the end of this short book will be a guide on how to sign up and find my scans for free. One last note, I will use the technique of monthly portfolio re-balancing but you can use longer time periods or even separate buy and sell rules (recommended) through the simulation portion at P123. I will add in my own simulations with customized selling rules at P123 later. Market Screen: Market Timing Fast Summary: This is my preferred market timing model. It tracks the consensus earnings estimate of the S&P 500 for the current year (see the middle box in the chart). After I know the daily and weekly revisions of the S&P 500 forecast earnings I trade the trend. When earnings are trending up I stay long and when the fall I go short. I do this with a 3 and 15 week moving average.

3 Has this approach been profitable over the past years?

4 This market timing model in just under 10 years has delivered 235.8% gains as opposed to the S&P 500 buy and hold gain of only 8.7%. There is one more aspect that I would add to this model confirm a new up or down trend by looking at the S&P 500 price chart. When you have a new bull signal wait for the S&P 500 to rise above the 100 day moving average as confirmation. When you have a new bear signal wait for the S&P 500 to fall below the 100 day moving average as confirmation. Most of my market timing filters have been added as an optional rule in my customized Portfolio123 stock screens so this can be done automatically for you. Stock Screen: Aggressive Dividends 1 Utility

5 This scan picks high yielding companies (over 5% dividend yield) that are defensive in nature such as utility stocks but it also includes other American companies such as oil pipeline Limited Partnerships. 5 year earnings and dividend growth must be above 0. You can read the specific rules at P123. The chart below includes the market timing rule. The compound annual growth rate is lowest of all my scans. This is more for the buy and hold investor. With a minimum yield of 5% and a compound annual growth rate of 9.1% - this defensive scan has yielded a 14.1% annual return. This seems pretty low right? Well if you started with $10,000 and added another $5,000 every year for 25 years how much gain would this result in? Your contributions of $135,000 total will compound into over $1.3 million dollars. This is a pretty doable plan to supplement retirement. But what happens if we buy and hold and we only rebalance yearly and do not use market timing? This lowers our compound annual growth rate to 11.12% (including dividends). Still a good market beating strategy. Stock Screen: Aggressive Dividends 2 - High-Yielding This next scan looks in the market for high-yielding stocks. These can be dangerous right? Not if you do it right. We look for yields that 20% higher than the stocks 5 year average, but we also require that dividend and earnings be more than 10% for the past 5 years. Yields must be a minimum of 3.5% and we disallow any financial and real estate stocks (risk) as well as utility stocks (we already covered that). No ADRs allowed as we have a special system for them. How does this system perform with the help of market timing?

6 Using monthly rebalancing we get the following chart: This is a 20% compound annual growth rate plus we get 3.5% 6% dividends. I have separate buying and selling rules in my simulation which I will release soon and it has even higher gains. Still, nobody is complaining with a 25% annualized growth rate. At this rate, if you started with $10,000 and no extra capital contribution you d have $2.65 million in 25 years time. Of course, none of my stats include slippage and trading fees along with some other profit-eroding factors. Stock Screen: Aggressive Dividends 3 ADRs This system adds diversification into your portfolio. ADRs are foreign stocks that banks can go and buy up in their local markets, repackage and sell to investors in other countries. Having exposure to different countries is a great way to diversify. But more than that we add in a powerful trading strategy that targets high yield and low payout ratio companies. If they are paying out a smaller percentage of earnings than their peers, yet their dividend yields are higher this signals a value buy. Yields must be at least 20% higher than the industry and payout ratios 20% lower than the industry. Some other requirements are share prices higher than $1, and no financials. Market cap must be at least $1 billion dollars. I must warn you that these are highly volatile picks when the markets tank so please use market timing rules.

7 Using monthly rebalancing we are able to generate 19% annual growth rates with yields in the 3 6% range. This provides a price and dividend compound annual growth rate in the low 20s. Again, there are selling rules so you do not have high portfolio turnover but you get a rough idea of how well this system works. Stock Screen: Aggressive Dividends 4 Value This next scan is one of my favorites of all time. It looks for tiny stocks with strong financial muscles that have deep value. It utilizes a Graham type ranking system for value and I also add in other requirements such as Current Ratio >2, long-term debt less than working capital, earnings above breakeven for various time frames in the past year, and some earnings growth over the last year and 5 years. Some relative filters include the bottom 50% of price to earnings ratios and price to book ratios. USA stocks only and no options allowed (to lower manipulation by hedge funds and traders) and you get the following results:

8 This gives a compound annual growth rate over more than 35.46% before dividends. Not all stocks screened have dividends though. Notice that I don t even use market timing with this stock screen because it is so strong and robust. If you are comfortable trading smaller stocks on major exchanges, this is one you should definitely check out. Stock Screen: AGGRESSIVE GROWTH: CANSLIM ON STEROIDS This scan is a take on the high-growth investing methods of William J. O Neil and CAN SLIM. It uses some a mix of absolute and relative trading requirements. *Bottom 50% of institutional ownership *Top 35% of earnings growth in the latest quarter, trailing 12 months, and 5 years *Earnings growth last quarter more than 20% *Top half of the market for price performance *Ranks min. 95 / 100 in a Portfolio123 ranking system for CAN SLIM stocks *Less than 20 million shares in the float *Price above $1 / share

9 It trades with high volatility so you should add market timing rules. There, that s better. This system (using monthly rebalancing) has an average annual gain of 40.41%. Of course, some of the stocks it picks up are small and illiquid so you ll need to be aware of that and not drive prices up with large purchases. Use limit orders as well. Stock Screen: AGGRESSIVE GROWTH: NASDAQ ROCKETS This scan finds little rockets in the NASDAQ. First, we want stocks trading with at least 100K daily and $5 per share. No options once again, positive earnings, and lower beta stocks for a reduction in volatility. Financial stocks are excluded.

10 The meat of this scan combines three different systems. It uses a CAN SLIM ranking, with Fiscal Momentum (which is similar to CAN SLIM but more emphasis on accelerating growth), and a basic price momentum ranking to pick stocks on rise. Two optional rules exist that you can play with that removes the top 20% of institutional ownership stocks and a market timing rule. I have them turned off by default as this scan is strong enough on its own. This is a 29.41% compound annual growth rate. If we apply the institutional ownership rule we see a marginal jump in gain by less than one percent but our downside portfolio loss (Sortino ratio) improves dramatically. Stock Screen: AGGRESSIVE GROWTH: UNDER $10 MICROCAP

11 This is a scan for those investors that like tiny microcap stocks for aggressive gains. I ll briefly run through the scan: *Non financials or real estate or closed-end funds or basic materials *Price more than $1 but less than $15 *Daily volume more than 50,000 shares *Remove top 30% of price to earnings ratio *Keep the bottom 40% of institutional ownership *Keep the top 40% of insider ownership *Earnings, earnings growth, and PE all above 0 *Market cap less than $2 billion *Basic momentum filters where the stock outperformed the market over the last year, 6 months, 3 months, and 4 weeks. A jaw-dropping 56% annualized growth rate. There are few stocks to be traded at any time so this is suitable for small amounts of capital. Still, if it were possible to invest $10,000 at these growth rates it would be worth over two-thirds of a billion dollars in 25 years. Reality check that isn t going to happen but those are still very high growth rates with this scan. Keep in mind I didn t use the market timing filter the momentum properties kept us out of the market if our tiny stocks were falling faster than the S&P 500.

12 Stock Screen: AGGRESSIVE GROWTH: 4 in 1 This is a combination of ideals that include quality, value, growth, and momentum. This is one of the best and most robust scans I have seen. *We start with a relative rank of 90 out of 100 in the *Quality/Value/Growth/Momentum ranking system *Price between 1 and 15 dollars *50,000 daily traded shares min *No closed end funds *Quarterly earnings growth is over 0 from last quarter and over 5% from same quarter last year *Basic momentum. This stock needs to have outperformed the market over the last year, 6 months, and 3 months *We only keep the top 10 ranked stocks This results in a compound annual growth rate just below 60%. This is possibly the strongest scan I have ever laid eyes on. These are strong and quality stocks. Yes they are small but they have enough liquidity to get in and out without too much problem and you do not even need any sort of market timing rules to make it work. Friends and investors that is it for this brief book that was meant to highlight some of my favorite scans. I know it did not go in-depth but neither did I mean to. I hope you get your free membership and start using these scans. Stay tuned for when I begin

13 releasing my simulations on Portfolio123 that will have separate buying and selling rules. This means higher gain and lower turnover of shares. Below is the process you can use to get a free membership at Portfolio123 and how to find my scans. Getting Setup on Portfolio123 Remember, we can get these scans freely on Portfolio123 this is not some advertisement pushing one product down your throat. You can also use my filters and scans to program it elsewhere. What are the steps for getting setup on Portfolio123? First, go to their website. You ll see a little green box like this: Click it and you will be taken to the next page to signup. After selecting what type of investor you are, you will be taken to a page that looks like this:

14 In the portion that asks about a referral and a code, enter in the word HKURTIS (but without the quotes). This will give you an extra long bonus trial. From here you will select the type of membership you want. Please note that you can select any level of membership you want and adjust it later (it is a simple click of the button to change membership levels no phoning or ing or anything like that). From there you will have 45 days to fully use the system and you can simply downgrade to the free

15 membership level if you do not want to continue to have full access when the 45 days are complete. If for some reason you don t see the invitation code box, try another web-browser. Sometimes it doesn t show up with my Firefox but it does with Google Chrome. Go figure. After signing up, go to the screener tab. Click on SAVED SCREENS. Your left hand side menu should look like the following: Click on the word SEARCH. The following fields will show up: There are a couple ways you can find my scans. One way is to type the name HEMMERLING in the Author box. The second way is to type in AGGRESSIVE GROWTH or AGGRESSIVE DIVIDENDS in the Screen Name box. A third way is to type in the actual screen name as it appears in this book (4 in 1, CAN SLIM ON STEROIDS, etc.). It will come up like this:

16 Click on one of the scans. From there you will be at the main screening box like this: As you can see in the tabs above, this is the rules box. At first, don t switch anything here. Leave it as is until you get comfortable with the scan. The RESULTS box will let you screen for applicable stocks at any point in history or for today if you are ready to buy. BACKTEST performs a basic test of how well this system has worked historically. ADVANCED BACTEST will let you check for robustness and show you what sort of gains it achieved on average during good markets and bad. I strongly recommend using the simulator for a more advanced and realistic way to trade, but this should get you going. I wish you all the best and please, if you think this e-book was worth 99 cents, please leave me some feedback so other people can make use of it too and it will inspire me to create more trading ideas and scans for the future. If you are a value investor or like dividends, check out my Aggressive Dividend book, website, or free scans on Portfolio123 under that name. Smashwords Edition, License Notes Thank you for downloading this free ebook. Although this is a free book, it remains the copyrighted property of the author, and may not be reproduced, copied and

17 distributed for commercial or non-commercial purposes. If you enjoyed this book, please encourage your friends to download their own copy at Smashwords.com, where they can also discover other works by this author. Thank you for your support.