Defensive value stock screen
Having the ability to screen out the vast majority of companies and shares is a massive advantage for modern investors.
However, most screens use outdated measures like the PE ratio and dividend yield, or perhaps three year earnings growth. These metrics have been shown repeatedly to have little predictive power, in other words, they are not a good way to find attractive investments.
That’s why I spent the best part of a year developing a unique screen to help me quickly and effectively hunt down quality companies at attractive prices. This stock screen in now available to members in both the monthly newsletter an as a weekly spreadsheet download.
The screen finds defensive companies that have consistent, long-term records of profitability, dividend payments and growth. It then looks for value, where the share price is cheap relative to long-term average earnings and dividend payments.
- Try out the stock screen using sample data >>
- If you’re a member, log in to access the full stock screen >>
How the screen works
The stock screen focuses on FTSE All-Share companies with long histories of profitability, reliable dividend payments and consistent growth. When it comes to investing in the stock market, these are the three things that really matter:
The most important return for many investors is their dividend income. Generally, income investors will prefer shares with high dividend yields, where the dividend can be increased over the years faster than inflation. Shares will rank higher on the stock screen when their price is low (and yields therefore high) relative to the company’s long-term dividend payments. Every single stock in the screen has an unbroken, decade-long history of dividend payments.
Another important source of returns for investors is growth of the company whose shares they own. This is impossible to calculate exactly, because the first question is, growth of what? The stock screen takes a common sense and long-term view of growth.
It does this by measuring growth of revenues, earnings and dividends over the long-term, in order to look for strong underlying growth, rather than being overly influenced by any one year’s results. It also looks at the quality of the company’s growth, favouring those companies with defensive characteristics, i.e. those that have grown revenues, profits and dividends consistently for many years.
The idea of buying low and selling high is often talked about, but rarely practiced. That’s because saying high or low begs the question, “high or low relative to what?”. For most investors the answer is this years earnings, or the most recent dividend. But current earnings and dividends are volatile and unpredictable, and so what looks low this year can easily look high the next year, even if the share price drops.
This stock screen provides a better idea of what’s high and what’s low because it focuses on long-term earnings and dividends, which by their nature change far more slowly and predictably than short-term earnings and dividends.
It is this focus on the long-term which really separates investors from speculators and traders, and it’s a lack of a long-term focus which often hurts many private investors.
A Screen is just the first step
Finding a successful company where the shares appear to be good value for money is a start, but it is not enough. There are many other things to consider, such as the overall diversification of the portfolio, the number of different companies to own, the sectors they should operate in, decisions on when shares should be sold to lock in capital gains, and so on.
Together these make up an investment strategy, and using a sound and sensible strategy is just as important as the screen you use to find your next investment.
UK Value Investor covers a rigorous and systematic investment strategy, which can be used with the stock screen to create diverse portfolios of market leading companies, bought at attractive prices.
The stock screen and investment strategy are brought together each month to manage a £50,000 model portfolio of 30 leading companies. In each issue one stock is bought or sold, buying companies that rank highly on the screen and selling existing holdings when their rank falls, typically due to rising share prices.