Part 1 – Filtering and Screening Stocks

Here is a quick summary of the types of stocks that I am looking for:

  1. The company must have strong fundamentals
    • Be on a solid financial footing – Meaning not a lot of debt when compared to cash and other assets.
    • Strong cash flow
    • Profitable, with growing sales and earnings
  2. Must meet my technical requirements (the chart must look good to me).
    • It cannot be in an extended downtrend
    • There has been a period of accumulation, where the share price has been relatively flat for a period of time, but is starting to show signs of upward movement: The start of an uptrend.
  3. A small market capitalization (shares outstanding x share price = Market Cap)
  4. The stock price is under $5/share
  5. The company should have a strong “story”, that is not that well known yet. Large “catalysts” that point in the direction for surge in their business

That is it in a nutshell….those are the 5 major criteria I am looking for. Not too complicated, pretty straightforward.

The question is…how do you find those stocks! Good question. On the U.S. stock exchanges, there is a total of about 8,000 stocks. That’s a lot to sift through, right?

Filtering to Find Stocks

Within that haystack of 8,000 or so stocks, there are stocks that are a exactly what I am looking for. The challenge is to find them! By using a filtering or screening service, you can drastically narrow the range of stocks you have to look through to find the ones that are ideal.

I use a service that is completely free where you can change the settings across over 67 different different settings (filters). At the bottom of this post I will give you more details about tool that I use.

The free web tool organizes them within 3 major groupings:

  • Descriptive – Describes the stock (For example: the share price,
  • Fundamental – Financial details for a company
  • Technical – Stock chart characteristics

Here is a breakdown of the settings by each grouping:

Descriptive

  • Exchange
  • Index
  • Sector
  • Industry
  • Country
  • Market Capitalization
  • Dividend Yield
  • Float Short
  • Analyst Recommendation
  • Option/Short
  • Earnings Date
  • Average Volume
  • Relative Volume
  • Current Volume
  • Price
  • Target Price
  • IPO Date
  • Shares Outstanding
  • Float

Fundamental

  • Price to Earnings Ratio (P/E)
  • Forward P/E
  • Price to Earnings Growth rate (PEG)
  • Price to Sales ratio (P/S)
  • Price to Book value (P/B)
  • Price/Cash
  • Price/Free Cash Flow
  • EPS growth this year
  • EPS growth next year
  • EPS growth past 5 years
  • EPS growth next 5 years
  • Sales growth past 5 years
  • EPS growth qtr over qtr
  • Sales growth qtr over qtr
  • Return on Assets
  • Return on Equity
  • Return on Investment
  • Current Ratio
  • Quick Ratio
  • LT Debt/Equity
  • Debt/Equity
  • Gross Margin
  • Operating Margin
  • Net Profit Margin
  • Dividend Payout Ratio
  • Insider Ownership
  • Insider Transactions
  • Institutional Ownership
  • Institutional Transactions

Technical

  • Performance Return
  • Performance Return 2
  • Volatility
  • Relative Strength Index (RSI – 14)
  • Gap
  • 20-Day Simple Moving Average
  • 50-Day Simple Moving Average
  • 200-Day Simple Moving Average
  • Change
  • Change from Open
  • 20-Day High/Low
  • 50-Day High/Low
  • 52-Week High/Low
  • Pattern
  • Candlestick
  • Beta
  • Average True Range
  • After-Hours Close
  • After-Hours Change

“Explaining” what I want to the Filter/Screen

Clearly, there is a ton of filtering criteria to pick from, right?! Each one of those single criteria (bullet point) has up to maybe 5-10 different settings. Imagine the hundreds of thousands (or multi-millions) of possible combinations you could come up with?

It seems a bit daunting. That is understandable, but it’s not so complicated.

The goal is to simply “translate” or “explain” what I am looking for to the filtering service.

Remember my criteria that I described towards the top of this post here?

  • I’m basically looking for a stock that has strong fundamentals, a good technical, has a price below $5 and has a small market capitalization.
  • I am also looking for some intangible qualities that is impossible to using a filtering service for, which is a unique story, a company that has catalysts to related to it’s business that is going to drive the price higher. That is where you will have to get all “old school” and roll up your sleeves to read the news about the most promising companies that pass through your filter.

Here is the criteria for one of my filters that I use:

We are starting with a universe of 7,676 stocks on this particular day. That is the number of stocks within the service’s database. At each step along the way, I’m going to list how many stocks remain after each filter criteria tightens the noose towards a smaller and smaller group of stocks that fit each step. Imagine a funnel, starting out very wide at the top and only a small trickle comes out at the bottom. That is what we are after.

Ok, here goes…

“The company must have strong fundamentals”

Here I am just picking two criteria from that list… one is related to the balance sheet and the other is related to the income statement.

  • Current Ratio = Over 1 (Compares all of a company’s current assets to its current liabilities. Shows that the company is able to have enough cash and other assets like accounts receivable on hand to pay it’s liabilities, like accounts payable, wages and taxes)
  • Price to Earnings ratio (P/E) = Greater than Zero (0) (It is profitable. This is calculated by dividing the share price by the earnings available per share. If it is less than 0, that means there is nothing to divide into the share price, right?)

“The company must have strong technicals”

This can be a bit tricky. You have to use settings such as moving averages and where they relate to other moving averages and/or the current stock price

  • 50 Day Moving Average is above the 200 Day Moving Average – this shows that the average price over the last 50 days is above the average price over the last 200 days. The stock could still be in a downtrend though, right?
  • Performance = Up for the year – The stock price is higher than where it was 52 weeks ago

“The price should be under $5 a share and be a smaller-sized company.”

  • Price = Under $5/share
  • Market Capitalization = Under $300 million – This is a super small market capitalization. Considered a “micro-cap

“The company should have a strong story with new catalysts that will rapidly grow their business”

For this one, there is absolutely NO filtering system that can help you here. You have to roll up your sleeves and dig into the news about the company, research everything you can about it on their website, message boards, news articles, etc. This takes some effort, but remember….you are only looking at stocks that made it to the very bottom of your funnel!

Here is how each of these settings filtered the universe of 7,676 stocks down to what turned out to be a total of 8 stocks.

  1. Start = 7,676 stocks
  2. Current Ratio = Over 1 = 3,241 stocks
  3. Price to Earnings ratio (P/E) – Greater than Zero (0) = 1,396 stocks
  4. 50 Day Moving Average (DMA) is above the 200 DMA = 1,245 stocks
  5. Performance = Up for the year = 970 stocks
  6. Price = Under $5/share = 40 stocks
  7. Market Capitalization = Under $300 million = 33 stocks

So there you have it. Out of the universe of 7,676 stocks to analyze, I’ve narrowed things down quite a bit.

So now have only 33 stocks to take a look at

Here is what I do at this point….

I take a look at the charts. This just takes a quick visual to see if it fits what I am looking for. Why waste time digging further through the balance sheet, income statement, news about what the company does and will be doing, when I can eliminate still more stocks by doing a quick visual scan?

Within those 33 stocks, this chart caught my eye that typifies what I am looking for:

Click the image to make sure you see the detail…

One of the stocks that made it through my filter. I like what I see here!

A quick visual scan can pick up the major technical aspects that I am looking for in a company’s stock chart.

The major ones are:

  • A period of accumulation
  • An uptrend
  • The stock has gone up a solid amount from the accumulation period and has been in an uptrend, and could be poised to break through previous points of resistance where the price spiked and fell back in August 2020, October 2020 and more recently in January 2021. It is testing that price area once again and the persistent uptrend gives me some confidence that it will break through.

I will cover the technical analysis portion in more detail in Part 5 of my mini-course

Summary about Filters and Screens

I have quite a few filters that I run on a weekly basis. This one that I’ve highlighted for you here is just one of many. Running a filter is just the starting point of my process. In this case, I had 33 stocks to look into further.

The quick scan of the charts for those 33 only produced 2 stocks that I thought had potential from a technical standpoint.

But there is more work to be done.

  • I need to take a look at the fundamentals further.
  • I need to read the news.
  • I need to research what others are discussing about the stock.

The odds are, those two stocks are not going to make the cut!

Remember…I’m only looking for the best of the best…the stocks that fit exactly what I am looking for. That is how I have been able to rapidly grow my investment account!

But this filter process that I have described to you…translating what I am looking for and inputting it into a filtering service as I have described is critical. If you don’t do this, you can fall into the trap of chasing the latest shiny object, a random stock that caught your eye. If you find yourself jumping from one investment or trade to the next, with some big wins and some big losses, it is likely because you did not follow a discipled and methodical approach.

Filtering helps you do that.

Ok, lets continue onto the next step!

Part 2 – Fundamental Analysis

P.S. – Get Tips on the Free filtering tool I use

Enter your email below and I will send you info on the only stock screening tool I use… as well as specific tips on how I use it to find stocks I describe in this tutorial.  The tool is completely free to use and is the starting point for every investment I make.