Tuesday, July 17, 2007

Cheap Growth Ready to Breakout Screen

In order to get more consistent results in the market, I've been trying to find good quantitative stock screens.

I managed to find one screen that seems to be working well:

1. Forward PE < 20
2. 5 Years Growth > 20%
3. Price above 200 day moving average
4. Price between 0 to 5% above 50 Day moving average
5. Price within 5% of 52 Week High.

My theory is to buy stocks that have great growth but are undervalued in the market. In addition, the stocks should be making higher highs, be within reach of a breakout, and yet be at a good accumulation point (slightly above the 50 day moving average).

In a question regarding whether to buy 52 week highs or 52 week lows, Jim Cramer on Stockpickr.com) says that:

"They dont get on the 52-week-high list for nothing.
Companies that get on it get there because they are in
the right sector and have the best execution. That's a
better list to buy on than just about anyone i know,
particularly on a 5% pullback.


I like IBD for this and Lee Cooperman, one of the great
investors, who emphasized this view to me when he was
running research at Goldman."

Part of the screen I developed seems to match what Lee Cooperman of Goldman Sachs has found out. It is good to buy 52 week highs especially on a 5% pullback.

Also, rather than using pure PE to Growth ratio, I prefer to use a PE of less than 20, and 5 year growth rate of greater than 20, guaranteeing us a PEG of less than one. Since the 5 year growth rate is less reliable than the forward PE, by choosing stocks with a low PE, we'll have a greater level of safety if a companies 5 year estimate starts going down.

I managed to create three portfolios using this screen in the past and in another article (here), I will check on the performance of all three portfolios.


Anonymous said...

I don't really know how to use the information on your 3 portfolios.. 1) For eg. some of the stocks have advanced and some declined, would the advancement of those stocks (higher share price now) tip the criteria set earlier hence making these stocks expensive to buy now?
2) what's the start and end period?

techfarmer said...

The "Results of the Three Portfolios" is simply a way to evaluate the performance of the screen when it created on February 23, 2007, March 14, 2007, and May 16, 2007. During those dates, I ran the screen and discovered the stocks. Then, on July 16, I checked the performance and I noticed that all portfolios are outperforming the indices. So it would seem, so far, that the screen is successful.

To use the screen properly, we have to run a screen today, and we will get a whole new set of stocks. I may create a new portfolio using the screen soon. Of course, when we start this portfolio, the performance would initially be 0%.

Let me know if this is still confusing you.

Anonymous said...

Thanks for explaining.
If I want to buy some stocks, should I then wait for your new screen for my stock selection?

techfarmer said...

I can create a new screen.

However, the stocks are just Starting Points.

Please do your Research! I offer no guarantees. You can lose money in the stock market.

Do you know how to analyze individual stocks and manage a portfolio?

ihearasong said...

criteria i use on the msn deluxe stock screener (i don't want guesses about the future; i use only past and current data):

1...P/E Ratio: Current <= S&P 500 Average P/E Ratio: Current
2...P/E Ratio: Current <= 1.5*Annual EPS Growth Rate
3...ROE: 5-Year Avg. >= 15
4...12-Month Relative Strength >= 80
5...Avg. Daily Vol. Last Month >= 100,000
6...Avg. Daily Vol. Last Month <= 1,000,000
7...Last Price >= 200-Day Moving Average

techfarmer said...


Great screen. Some of your criteria reminds me of Investor's Business Daily screens:

Investor's Business Daily Online