My Stock Screener – Part 2:

My Selection Process

A good investment strategy is not just about being superior on paper. It is rather a question of whether it perfectly suits your needs, so that you stick with it no matter if the stock market is rising or falling.

Back when I was exploring different investment strategies, I quickly realized that I would prefer a long-term investment approach. But in order to identify companies that fit my needs, I first had to establish an adequate selection process.

Therefore, I created my own stock screener, which is supposed to help me finding companies that are characterized by:

  • a stable business model,
  • a steady earnings growth and
  • an exceptionally low price.

For this purpose, one could consider a sheer endless number of different business figures. However, I only use what I believe to be the most meaningful variables:

  • share price,
  • earnings per share and
  • dividend per share.

You can get these 3 variables easily and for free from:

  • an online broker (share price),
  • a company’s financial statements (earnings and dividend) and
  • an appropriate financial website (earnings and dividend estimates).

My Assessment Criteria

In addition to 160 German companies, my stock screener now also includes many big international companies as well as several smaller businesses. That way I can keep track of more than 500 individual stocks at once.

I determine the attractiveness of each company and its stock based on 4 assessment criteria:

How cheap is the Company?

I think a company’s stock is cheap if its current price-earnings ratio (PER) is lower than its average PER (since 2004). Therefore, my stock screener awards bonus points (minus points), if the company’s current PER is lower (higher) than its long-term average PER.

How strong is the Company?

I think a company is strong if it is able to increase its profits long-term (since 2004) and medium-term (since 2011). Therefore, my stock screener awards bonus points (minus points), if the company shows positive (negative) earnings growth for both periods.

How robust is the Company?

I think a company is robust if it is able to steadily increase its profits (since 2004). Therefore, my stock screener awards bonus points, if the company is able to increase its profit year after year, and minus points, if the company’s earnings declined at least once.

Is the Company currently a Bargain?

I think a company’s stock is a bargain if its long-term trend in earnings growth (since 2004) justifies its current PER. Therefore, my stock screener awards bonus points (minus points), if the company’s current PER is lower (higher) than I would allow for.

My Stock Screening Result

The result of my stock screener – the so-called “Dividend Diary” score (DD score) – is simply the sum of a company’s bonus and minus points.

Companies with a DD score of less than -10 rarely make it on my watchlist, let alone my portfolio. With a DD score of -10 or higher a stock qualifies itself for deeper analysis. A DD score of 10 or higher is seen as a buy signal.

Apart from my DD score, I also take a company’s dividend policy into account. That is why before every purchase, I not only check the current dividend yield, but also have a look at the dividend growth rate and the dividend track record as well as the payout ratio.

In summary, my stock screening method is a very selective selection process. While there is hardly any company with a DD score of 10 or higher, it is even rarer that such a company also shows a striking dividend history. Should I still identify a company like this, I write about my finding in my stock series.

More details about my stock screening process can be found here:

Full transparency: All of my stocks, funds, bonds and options are subject to multiple risks. However, I’m neither a financial nor an investment professional. Hence, the presented information is not to be understood as any financial advice or recommendation. I’m not liable for any losses or suffering experienced by any party. More detailed information is available here (only in German).