What to Do with Stock Screener Results for Penny Stocks
Even after using multiple search criteria on your stock screener, you may sometimes end up with thousands of penny stock results. Usually this is due to your screening parameters being too broad. To generate a more manageable number of results, go back and make those criteria tighter, lower, or more demanding. You may need to refine your screens several times before you end up with a reasonable number of stocks.
As soon as you do start producing manageable lists of stocks that pass your screen, you may want to apply an additional parameter before you start looking at them any closer. Screens will always include companies that fall within your search parameters but that you know you’d never invest in. Take a few minutes to manually scan the list and remove companies based on your own criteria.
You may be able to quickly pare down a list of a couple hundred companies to only a dozen or so by removing any stock that meets the following parameters:
Holding companies: Holding companies have their own set of rules. They are typically indicated with the words Holdings or Holding Company in their name. If you are looking for holding companies specifically, or don’t mind that they are more appropriate as legal-protection entities than as companies for investment, then by all means keep them in your results. Otherwise, remove them from the list.
Class of shares: Companies can have different classes of shares, although this is much more common in larger stocks. The various classes of shares have unique rules and prices; for example, class A shares provide their shareholders first rights to the corporation’s assets in the event of a bankruptcy, while class B shares may not provide those same privileges. You may want to manually remove any special share classes.
Weak names: Never invest in companies that have obviously weak or nonsensible names. A corporation known as Industrial Production Company has such a generic and uninspiring handle that you can only assume that its managers are questionable as well.
Specific industry groups: Unless you set your screening results to come from a specific industry, you will get companies from all of them. Because an industry screen is often too specific, many investors don’t set that as a screening criterion. You may not want to buy shares in any mining, or biotech, or industrial companies, but your other parameters will let these companies past.
Specific nations: You may decide to manually eliminate any stocks based on their country of origin. For example, when companies based in China but trading on the U.S. stock markets began widely reporting unreliable financial information, you ,ay want to eliminate those stocks from your screened list.
Screening previously screened results is the best way to refine the output. As soon as you get familiar with the process, you’ll be able to pull in results of the better-quality companies and then quickly focus that down to a small collection of penny stocks, thereby increasing your chance of achieving excellent results.
As important and helpful as screeners are for refining your search, there are plenty of things they won’t tell you. Some of these omitted or undiscovered facts are actually among the most important.
Stock screeners won’t reveal to you several very significant factors, including (but not limited to) the following:
Management effectiveness: Stock screeners have no way of assessing the quality of the executives. You, on the other hand, can speak with them, or see what they’ve done in the past, or watch as they apply and roll out their strategies.
Competitors: Although you can include a penny stock’s peers and competitors in your screen, the tool won’t be able to predict or assess new competition that springs up or identify when a company or new technology moves into a new market segment. The screener also can’t take into account barriers to entry or marketing and branding effectiveness.
Trends: Stock screeners don’t see trends. To spot trends, you need to rely on your common sense and observation skills.
Comparative values: The more numbers and companies you want to compare and review, the more difficult and complicated the process becomes. Modern screeners can be useful, but you may be best served by using a limited number of criteria at first, and then delving deeper into those results the old-fashioned way: using your common sense and brain power.
Growth or decline of an industry: Screeners can’t factor an industry’s growth into the results. Your best bet might be to know the average growth rate for an industry, for example, and then run a growth screen on companies within that space. By combining your own knowledge with the results from a screener, you may improve your odds of finding higher quality investments.
Value of intangibles: Intangibles include things like trademarks, patents, and copyrights. Because there is no quantifiable method to value such items, stock screeners can’t filter for them.
Legal battles: Screeners don’t factor in lawsuits and their potential impact on companies.
Given their limitations, treat stock screeners as tools to help decrease your total number of investment options. Use them to kick off your analysis, but plan on performing further due diligence and analysis.