Fundamentals / My Quick Value Scan ~ market folly

Wednesday, June 11, 2008

Fundamentals / My Quick Value Scan

One thing that's bothered is me is I've come across blogs that post up "Oh I ran my scan yesterday..." but they fail to tell us what the scan actually is, as if its some huge protected secret. So, thought I would go over one of the main scans I run to get a quick glance at possibly undervalued equities.

This is a quick fundamental scan I run on yahoo finance, just to keep up to date weekly on what equities are nearing tempting levels. This is a value based scan, but I am NOT a deep value investor. So, the various banks or retailers that come up in this scan I'll take a quick look at, but I rarely invest in or trade those names. You have to weed through the garbage, because more often than not, there's some garbage that shows up. I'll call this scan "QuickValue". This scan has provided me with past beauties such as Ensco drilling (ESV) and more. Let's get to it, here's what you want to run in your scan:

PE < 15 (<25 if you want to loosen up the restrictions)
Return on Equity > 20%
PEG ratio < 1 (< 0.5 for extremely undervalued companies)
Price to book < 2.5 (< 1.2 if you wish to be like Benjamin Graham)
CurrentRatio > 1.5
Price to sales < 5

A few additional categories you can add:
Strong dividend growth
Low debt to equity
EPS growth of 3.3% of more year over year for a 5 year period
Strong Insider Ownership
Strong Institutional/Hedge Fund Presence

Now, as you can see, you can tweak a whole bunch of different things within that scan (omit a few categories, add a few categories, etc). I run the loose scan first and then fiddle around a little bit. Please note that I do NOT find all my companies through this scan. Companies like Apple (AAPL) and some of the fertilizer plays Potash (POT) and Mosaic (MOS) would never show up on these scans, and yet I'm invested in them. This is just one of the starting places I look for ideas in terms of value. Remember, this is a quick, loose VALUE scan.

Typically, the main things I look for in my companies not necessarily found in this scan are operating margins between 15-20%, a return on equity greater than 15%, strong (accelerating) quarterly revenue growth on a year over year basis, strong (accelerating) quarterly earnings growth on a year over year basis, a PEG ratio of under 1, a price to sales of under 5, insider/institutional/hedge fund ownership.

This is just an idea of fundamental things to look at when you're starting your research on any stock. This is literally just the tip of the iceberg in terms of fundamentals. But, I've found it to be a good starting place to generate some ideas and find some value for the value side of the portfolio. Fiddle around with some of the constraints and see what you come up with. Anyone have any other favorite scans they use pretty often?