Calculation

My Stock Screener – Part 3:
Calculation

I use my own stock screener to identify potential candidates for my watchlist and portfolio. Based on 4 assessment criteria, I’m looking for companies that are characterized by a stable business model, a steady earnings growth and an exceptionally low price.

For a better understanding of my stock screening result – the so-called “Dividend Diary” score (DD score) – I discuss the details of my calculation hereafter:

How cheap is the Company?
Calculation

To calculate how cheap a company currently is, I divide the current price-earnings ratio (PER) by the long-term average PER since 2004:

\bigg(\frac{current~PER}{PER~since~2004}-1\bigg)^2\times1.5

To ensure that high differences have a disproportionate impact, the result is squared and then adjusted by a weighting factor.

Result

My 1st assessment criterion has a range from -100 (particularly high PER compared to long-term average) to +150 (particularly low PER compared to long-term average):

\min\{ -100\} \max\{ +150\}
Example
British American Tobacco

(as of 2018-12-21)

In case of BAT, PER is currently sitting at 8.2. This is less than its long-term average of 13.7.

\bigg(\frac{8.2}{13.7}-1\bigg)^2\times1.5=+23.6

Therefore, BAT’s shares seem to be significantly cheaper than usual. I would grant 23.6 bonus points.

How strong is the Company?
Calculation

To calculate how strong a company is, I determine the average annual earnings growth since 2006 and 2011:

\sqrt[\scriptsize current~year-1-2006]{\frac{average~earnings~past~3~years}{average~earnings~2005\text{--}2007}}-1 \sqrt[\scriptsize current~year-1-2011]{\frac{average~earnings~past~3~years}{average~earnings~2010\text{--}2012}}-1

Then only the lower annual earnings growth is taken into account.

Result

My 2nd assessment criterion has a range from -100 (particularly strong drop in profits since 2006 or 2011) to +100 (particularly strong earnings growth since 2006 and 2011):

\min\{ -100\} \max\{ +100\}
Example
British American Tobacco

(as of 2018-12-21)

In case of BAT, the lower of the two annual growth rates is 7.4%:

\min\bigg(\sqrt[\scriptsize 13]{\frac{3.44}{1.36}}-1;\sqrt[\scriptsize 8]{\frac{3.44}{1.91}}-1\bigg)=+7.4

Therefore, BAT seems to be a very strong company. I would grant 7.4 bonus points.

How robust is the Company?
Calculation

To calculate how robust a company is, I determine the maximum annual drop in profits since 2004:

-\frac{(maximum~annual~drop~in~profits~since~2004)^2}{3}

To ensure that high differences have a disproportionate impact, the result is squared and then adjusted by a weighting factor.

Result

My 3rd assessment criterion has a range from -33.3 (at least one annual loss since 2004) to 0 (not a single annual profit decline since 2004):

\min\{ -33\frac{1}{3}\} \max\{ 0\}
Example
British American Tobacco

(as of 2018-12-21)

In case of BAT, the maximum annual drop in profits was just under 37%.

-\frac{(-36.5\%)^2}{3}=-4.4

Therefore, BAT seems to be a robust company. I would grant 4.4 minus points.

Is the Company currently a bargain?
Calculation

To calculate whether a company’s stock is a bargain, I divide its current PER by a risk-adjusted PER. For this purpose, I award each company a PER of 18, which is subsequently reduced by one point in PER for every 10% decline in earnings for the year with the maximum annual drop in profits since 2004:

-\frac{\bigg(\frac{\normalsize current~PER}{\normalsize 18+(maximum~annual~drop~in~profits~since~2004\times10)}+1\bigg)^2}{12}

To ensure that high differences have a disproportionate impact, the result is squared and then adjusted by a weighting factor.

Result

My 4th assessment criterion has a range from -100 (currently very high PER and at least one annual loss since 2004) to 0 (currently very low PER and not a single annual profit decline since 2004):

\min\{ -100\} \max\{ 0\}
Example
British American Tobacco

(as of 2018-12-21)

In case of BAT, the maximum drop in profits of 36.5% would justify a PER of 14.35. This is more than its current PER of 8.5.

-\frac{\bigg(\frac{\normalsize 8,2}{\normalsize 18+(-36.5\% \times10)}+1\bigg)^2}{12}=-2.7

Therefore, BAT’s stock seems like a real bargain. I would grant 3.7 minus points.

Overall Stock Screening Result
Calculation

To calculate how attractive a stock is, my stock screener simply adds up all of a company’s bonus and minus points. This calculation amounts to my final stock screening result – the “Dividend Diary” score (DD score):

\sum \limits_{i=1}^{4}Assessment~Criterion_i=\text{JiR~score}

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.

Example
British American Tobacco

(as of 2018-12-21)

In case of BAT, my stock screener shows a clearly positive DD score:

23.6+7.4-4.4-2.7=+23.9

Therefore, BAT would be a buy candidate for me.


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).