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How to use the Stock Filter

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Fundamentals (2,200 companies)

The Stock Filter allows you to screen the largest 2,200 companies listed on the London Stock Exchange using the following criteria:

Turnover (£m)

Turnover, or sales, is the total value of all goods and services sold by a company in the previous financial year.

You can use turnover to filter for:

• Companies of a certain size. For example: sales more than £100 million
• Early stage companies. For example: sales less than £1 million if you are filtering for early stage companies, or sales more than £0 million if you want to screen them out.

Early stage companies include mining and exploration companies yet to bring mines into production and technology companies yet to bring a product to market.

Operating profit (£m), Pre-tax profit (£m)

Profit is the ultimate goal of enterprise. It is what is left once the cost of producing and selling a company's goods or services are deducted from turnover. Because there are different kinds of costs there are different measures of profit. Operating profit is turnover minus the firm's overheads; items like raw materials, wages, rent, and transport. If you also deduct exceptional charges and the cost of financing the business through debt (interest payments) you get pre-tax profit, the most commonly quoted figure for profit.

Arguably operating profit gives a better view of how the business is performing, but because pre-tax profit is more comprehensive it is usually a more cautious measure. The exceptional items included in the pre-tax figure are costs that are not expected to recur in normal trading, for example the cost of closing down a plant.

You can use profit to filter for:

• Companies that are, or are not profitable. For example: pre-tax profits more than £0 million.

Market capitalisation (£m)

If you add up the value of all the shares in a company, you get its market capitalisation or the price investors put on the whole company. Like turnover you can use it as a measure of size. Typically investors regard larger blue chip companies as safe in comparison to small caps but believe smaller companies have more potential. These are of course generalisations, and there are many exceptions, but if size matters market capitalisation is probably the best way to screen for it.

You can use market capitalisation to filter for:

• Companies of a certain size. For example: market capitalisation less than £100 million.

Ratios (2,200 companies)

The Stock Filter allows you to screen the largest 2,200 companies listed on the London Stock Exchange using the following criteria:

EPS (pence)

Adjusted earnings per share measures the profit owned by shareholders once tax, interest, and all the costs of running the business are paid (this is known as profit after tax). Some of it will be paid out to shareholders as dividends and the rest retained by the company to finance its operations and make more profit for shareholders.

Analysts do two things to turn profit after tax into adjusted earnings per share. First they eliminate exceptional profits or losses. One-off events like the cost of closing a business do not reflect on the company's operations.

They divide the adjusted figure by the average number of shares in issue over the year. A company may have issued more shares to fund expansion, for example, so even if it makes more profit this year than last a shareholder might own less profit than before simply because he owns a smaller portion of the company. Calculating the per share value means an investor can tell if the company has really made more profit for its shareholders.

For this reason adjusted EPS is perhaps the most important measure of a company's performance over time. However, it is not useful for comparing different companies because a company with a high EPS is not necessarily more profitable than a company with a low EPS. It might just have fewer shares in issue.

You can use profit to filter for:

• Companies that are, or are not profitable. For example: EPS more than 0
PE ratio

The price earnings ratio is probably the most widely used yardstick for comparing the prices of companies because it relates the price you pay for each share to the earnings you receive. In a sense you can see what you are getting for your money. It is calculated by dividing the previous day's closing price by adjusted EPS.

PE ratio = price/EPS*
*Adjusted, taken from the last reported accounts.

Investors buying shares in a company with a high price earnings ratio are paying more in terms of earnings than investors buying shares in a company with a low price earnings ratio. Why would they do that? The price side of the equation is determined by expectations. If investors are confident a company will make increasing profits in years to come they will be prepared to pay more for a share of those profits. If the outlook for the company is static, or risky, they will pay less.

Very high PE ratios can be dangerous because expectations are so high a small stutter in a company's performance can send the share price tumbling. But low PE ratios do not necessarily mean a share is good value. It is quite possible that investors are rightly avoiding the company because its prospects are dismal. One trick is to try and identify shares trading on relatively low PE ratios with reasonably good growth prospects, a strategy known as Growth at a Reasonable Price (GARP).

You can use the PE ratio to filter for:

• Companies that are rated lowly or undervalued (potential value shares). For example: PE ratio less than 15 and more than four.
• Companies that are rated highly (potential growth shares) or overvalued. For example: PE ratio more than 20.

It is important to remember PE ratios vary widely across sectors. At the time of writing the Steel & Other Metals sector (admittedly represented by only one company) trades on a PE ratio of 4.5, while the Investment Companies sector trades on a PE ratio of 54. The PE ratio for the FTSE All-Share index is 15. The Financial Times publishes sector PE ratios every Saturday.

Dividend yield

The dividend yield is the cash return you get over the year in dividends expressed as a percentage of the share price. The dividend yield of a company can be compared not only with the dividend yields of other companies but of any investment that pays a yield or interest, such as bonds and savings accounts.

Watch out for abnormally high dividends. If the price has fallen so far the company is paying much more than that, investors may be selling because they fear the company cannot afford to pay its dividend next time.

Investors seeking income will buy high yielding shares, but history shows that much of the time high yielding shares do better than growth shares on the stockmarket. This may be because yields rise as prices fall (as long as the company continues to pay the dividend) so investors who buy when the yield is high are paying a low price. If the company recovers, they profit.

Use dividend yield to filter for:

• High yielding shares. For example: Dividend yield more than 4% and less than 7%.

Share data and performance

Bid/Offer Spread (%)

The bid offer spread is the difference between the market bid (buy) price and the market offer (sell) price, expressed as a percentage. The best bid and offer price is known as yellow strip.

The reason for filtering on bid/offer spread is to get an indication of the liquidity of the stock and to help you analyse potential profit and loss on any investment. The larger the bid/offer spread, the greater the share price movement has to be for you to make a profit.

Example: If the share price is quoted at 5/5.5p (a 10% bid/offer spread), and you buy at 5.5p, the share price has to move 10% before you break even.

As a general rule of thumb, larger companies are more liquid, therefore the bid/offer spread will be tighter.

Volume as % of shares in issue

This lets you filter on the volume of company stock traded today, divided by the number of shares in issue.

The reason for filtering on this criterion is to get an indicator of particularly hot stocks, for example where there's currently a lot of trading activity (of course some stocks – particularly large ones - will always be in play).
An important point to remember is that the filter only refers to the current day's trading and is updated hourly (therefore the first hour of the day is likely to record less activity than, say, the last hour of the day).

Last closing price

This filter allows you to select stocks at a particular price. You might, for example, be a follower of penny shares, or you might have a limit of price per share you want to invest.

Today's change, one week change, one month change, three month change, six month change, annual change

This allows you to filter according to changes in the share price (determined by percentage) over different time periods. Remember, you can look for shares that have dropped in value, as well as those that have risen in value. Simply include a minus sign when you enter the percentage value you're looking for into the more than or less than input boxes.

Broker forecasts (850 companies)

The Stock Filter allows you to screen consensus forecasts for the largest 850 companies listed on the London Stock Exchange. Forecasts for a number of brokers are collated for each company and aggregated to form a consenus. This consenus view protects the investor from the possibility that any single broker's forecasts might be incorrect.

As investors are primarily concerned with a company's prospects filtering broker forecasts makes a lot of sense. But forecasts are not fact, they are predictions. If new information comes to light, say a company reports slack trading, brokers will revise their forecasts. And that can bring about sharp changes in a company's share price.

In all of the following examples (next) is the forecast for the financial year following the last reported financial year and (next+1) is the year after that.
These are the criteria you can filter:

Sales (next), sales (next +1)

Sales, or turnover, is the total value of all goods and services analysts expect the company to sell in forthcoming financial years.

Number of brokers

Because the consensus forecasts provide reassurance it pays to check how many brokers cover a company. If it is only one or two, then there is not much of a consensus after all.

Safety in numbers does not appeal to all investors though. Contrarians sometimes favour companies with few or no analysts following them. Such companies are likely to be small, or dull, but they may not remain so. If the contrarian has reason to believe the company will perform well and become more fashionable in future, he will buy in before the City catches on.

You can use number of brokers to filter for:

• Companies that are heavily researched. For example: number of brokers more than 10.
• Companies that are overlooked. For example: number of brokers less than 2

Broker weight buy/sell consensus

Because brokers need to attract business from companies, their buy recommendations are notoriously positive. Some investors, possibly tongue in cheek, say they use them as a sell indicator. Others count a strong buy as a weak buy, a weak buy as a weak sell and a weak sell as a strong sell. Most dismiss buy and sell recommendations as window dressing and focus on the forecasts instead.

To help with filtering, each level of recommendation is assigned a percentage value:

• 50 to 100% is a strong buy
• 1 to 50% is a weak buy
• 0 is neutral
• -1 to -50% is a weak sell
• -50% to -100% is a strong sell

A company rated buy by two brokers, weak buy by seven brokers, and neutral by two brokers gets a consenus rating of 50% - right on the cusp of buy and strong buy.

A company rated neutral by two brokers and sell by one gets a weak sell consensus rating of -33%, or weak sell.

Use broker weight buy/sell consensus to filter for:

• Companies that are highly recommended by brokers. For example: broker weight buy/sell consensus more than 50% and less than 100%.
• Companies that are rated strong sell by brokers. For example: broker weight buy/sell consensus more than -100% and less than -50%.

Broker buy/sell consensus revisions

This relates to the number of brokers who have revised their recommendation (this can be from buy to sell, from neutral to buy, etc) on a company. It is regardless of a positive movement or not, and a greater number of revisions indicates a stronger shift in sentiment.

Total earnings (next), total earnings (next +1)

This relates to the annual profits of a company (after deduction of tax, dividends to preference shareholders and bondholders) expected for the next financial year (next) and the financial year after that (next +1).

The annual profits of a company after deduction of tax, dividends to preference shareholders and bondholders. Earnings are usually expressed on a per-share basis (7p), and the earnings per share (EPS) figure is calculated by dividing total earnings by the average number of shares in issue for the relevant accounting period.

For example: earnings of £2 million, with 10 million shares in issue would give an EPS of 20p.

You may see earnings used in several ways:

• Reported earnings: the figure in the company's accounts
• Underlying earnings: the figure derived from reported earnings by excluding any one-off items (e.g. profit from the sale of land which is not part of the company's normal business)
• Diluted earnings: earnings after adjustment has been made for shares that may be issued in the future if holders of options, warrants and convertibles choose to exercise their rights.

Cash flow per share (next), cash flow per share (next +1)

This relates to the difference between a company's incoming and outgoing monies expected for the next financial year (next) and the financial year after that (next +1). If more money flows into a business than out of it, it is cash positive. If more money flows out than in, it is cash negative.

Cash flow is regarded by many as the ultimate test of financial health. Seasoned analysts do not entirely trust the figure a company puts on its profits, since profits can be massaged, whereas cash is more difficult to manipulate. Profit, as they say, is a matter of opinion. Cash is a matter of fact.

The best way to check the cash flow position of a company is to scrutinise the cash flow statement in its annual report and accounts. It provides fact on whether a company has generated or consumed cash in the year, and how. It can be used in conjunction with the P&l to assess the trading results, or it can be used in conjunction with the balance sheet to assess liquidity, solvency, and financial flexibility.

Net dividend (next), net dividend (next +1)

This allows you to filter on the amount of dividend, per share, that's forecast for the company's next financial year (next) and the year after that (next +1).

EPS growth (next), EPS growth (next +1)

This allows you to filter on the percentage growth in earnings per share forecast for the company's next financial year (next) and the year after that (next +1).

Dividend yield (next), dividend yield (next +1)

This allows you to filter on the dividend yield (the cash return you get over the year in dividends, expressed as a percentage of the share price) forecast for the company's next financial year (next) and the year after that (next +1).

PE (next), PE (next +1)

This allows you to filter on the price earnings ratio forecast for the company's next financial year (next) and the year after that (next +1).

Discussion Boards

Posts (1 day), posts (7 days), posts (30 days)

You can gauge the level of interest in a company by filtering on the number of messages posted to its Interactive Investor discussion board within the last day, week or month.

Sometimes it pays to check what is being said on the discussion boards. Very high numbers of posts can result from rampant speculation, which may attract traders or repel contrarian investors. It can also be a sign that posters have gone completely off the subject.

Use posts to filter for:

• Companies with high levels of private investor interest. For example: posts (1 day) more than 10.
• Companies attracting little private investor interest. For example: posts (30 days) less than 2.

Buy RECS (1 day), buy RECS (7 days), buy RECS (30 days), sell RECS (1 day), sell RECS (7 days), sell RECS (30 days)

To find out which companies discussion board members rate most highly you can filter on the number of buy or sell recommendations they make when they post messages.

Just as with broker recommendations, private investors have their own reasons for recommending a company (for example, they might own it and have an interest in seeing the price rise). It is best to think of the recommendations as other people's views for you to interpret.

Use buy RECS to filter for:

• Companies that are rated highly by the private investor community. For example: buy RECS (seven days) more than 10.

RNS

Directors' dealings (1 day), directors' dealings (7 days), directors' dealings (30 days)

This relates to the amount of news announcements from the LSE relating to any share dealing activities (either buy or sell) by company directors – within the last day, week or month.

Where can I find out more about stock filtering?

Articles

Analyst and investment writer, Peter Temple, uses stock filtering in the selection of his Model Portfolios - updated monthly on Interactive Investor.

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