How to Use a Stock Screener to Find Value Stocks

The easiest way to find stocks for value investing is to use a stock screener. Stock screeners will filter all available stocks, only showing you stocks that fit your specifications. This technique obviously cuts your research time down. It also allows you to spend more time analyzing companies that are worthwhile.

Personally, I use Google Finance’s stock screener, because it is very simple to use for Canadian companies. However, I also use Morningstar’s. Whichever you use is your personal preference. I would recommend trying both out to see which one suits you better.

Metrics in a Stock Screener

The first metric you should use to find value stocks in a stock screener is the Price to Earnings ratio. The P/E ratio is the most basic way to tell if a stock is undervalued. In my stock screener, I look for companies with a P/E of less than 15. Some blogs recommend looking for a sub-20 P/E in today’s economy. Personally, I feel safer looking at companies trading for less than 15 times their earnings.

Price to Book, or P/B ratio, is another great value to show you the valuation of a company. If a company is trading at or below their book value, they are probably a good investment, depending on other metrics. In my stock screener, I look for companies who are trading at 1.5 times their book value or less.

We’ve talked a lot before about investing in ‘healthy’ companies. This doesn’t mean companies in the health food industry! Instead, we want companies who don’t have a lot of debt, or can easily pay off that debt. There are two ratios that can help us with this in a stock screener.

First, you want to have a debt/equity ratio that is as low as possible. Under 1 is great, but under 0.5 is ideal. You can decide which of these you would like to put into your metrics. Second, you can use the current ratio to filter for companies that have the ability to pay off their debt quick. The rule of thumb for this ratio, determined by Ben Graham, is that a current ratio should be greater than 2.

Optional Metrics for your Stock Screener

There are a couple other metrics you can put into your stock screener to look for even more specific stocks. For instance, many people say that you should only look at companies with a market cap of 1B or more. By doing this, you are much more likely to find undervalued companies. In my opinion, this is great for a conservative stock selecting strategy. I usually look for market caps over 500M.

Dividend yield is another metric you can look for when selecting stocks. If you are set on looking for dividend stocks, use a 3% yield in your stock screener so that you will only see companies paying a decent dividend.

Stock screeners are great tools and can be critical when trying to narrow down the stocks you want to analyze. I would recommend using a stock screener to get a list of possible value stocks, then do an analysis of each one. By doing this, you will have greater success than if you simply look at companies at random.

If you are interested in getting a guide to valuing stocks, sign up to our email list at the bottom of this page to get a free PDF showing you how to use Ben Graham’s own valuation technique!

Join the Insider's List

Subscribe to get our latest content by email, as well as your free guide!

2 Responses to “How to Use a Stock Screener to Find Value Stocks

Leave a Reply

Your email address will not be published. Required fields are marked *