Advanced Variables for Screening Online Stocks - dummies

Advanced Variables for Screening Online Stocks

By Matt Krantz

Just using the basic screening variables for online stock investments is somewhat limiting. If you want to carve the list of stock candidates further, you can use some more advanced variables. Good choices here include the following:

  • Gross margin: One of many ways to measure a company’s profitability, gross profit is how much revenue a company keeps after paying for things directly involved in the production of the good or service sold. A lemonade stand’s gross profit is the dollar value of the lemonade sold minus the cost of things used in the lemonade, such as sugar and lemons. This gross profit divided by the company’s revenue gives you gross margin. Gross margin tells you how much of every dollar in sales the company keeps after paying costs directly tied to making the good or service. The higher the gross margin, the more profitable the company is.

  • Operating margin: This method of measuring a company’s profit includes more costs than gross margin. Operating profit is gross profit minus indirect costs, such as overhead. Overhead might include the cost of hiring a company to promote the business. Operating margin is the company’s operating profit divided by revenue. The higher the operating margin, the more profitable the company.

  • Net profit margin: This particular margin compares the company’s bottom line with its revenue. Net profit is measured by dividing a company’s net income, which counts all company costs, by its revenue. It tells you how much of each dollar in revenue the company keeps as profit after paying all costs. The higher the net profit margin, the more profitable the company.

  • Return on equity: A great way to see how efficiently the company’s management is using the money invested in the company, return on equity (ROE) is measured by dividing net income by shareholder’s equity. Shareholder’s equity measures how much money shareholders have invested in the company. So, ROE shows you how much profit the company generates per dollar invested in the company.

  • Return on assets: Shows you how much profit the company is able to squeeze out of its assets. The higher the number, the better the company is at making money from things it owns.

  • Dividend payout ratio: Tells you what portion of profit a company is paying out as dividends. You calculate this ratio by dividing a company’s dividends by net income.

    If a company’s dividend payout ratio gets high — paying 85 percent or more of its profit out as earnings, for example — it might be paying more than it can afford, depending on what industry it is in.

  • Dividend yield: Tells you what kind of return you’re getting as a dividend from the money you’ve invested in a stock. The dividend yield is a company’s annual dividend paid per share divided by the stock price. A $10 stock that pays $2 a year in dividends has a 2 percent dividend yield.

  • Institutional ownership: This measure tries to show you whether the “smart money” is buying a stock. The ratio shows you what percentage of shares are in the hands of large mutual funds and pension funds, which presumably have large research units. Some investors look for stocks with low institutional ownership, figuring the stock will rise rapidly as these big investors discover the stock and buy shares.

  • Debt-to-equity ratio: Shows you how deeply in debt a company is. The ratio divides a company’s liabilities by its shareholder equity. The higher the ratio, the more leveraged, or in debt, the company is. Remember, though, that different levels of debt are acceptable in various industries.

  • Beta: Most online screening tools use a measure called beta to gauge volatility. The higher beta is, the more volatile the stock is compared to the rest of the stock market. If a stock has a beta greater than 1, that means it’s more volatile than the Standard & Poor’s 500. If a stock’s beta is less than 1, it’s less volatile than the S&P 500. And if a stock’s beta is equal to 1, it’s equally as volatile as the S&P 500.

    If you can’t stomach stocks that swing as wildly as the stock market, you want to add a beta filter to your screens. Just look for stocks that have betas of less than 1.

  • Short interest: Short interest measures how many investors are betting a stock will fall. The measure is calculated by dividing the number of shares being shorted — or being sold in a complex maneuver by investors betting that the stock price will fall — by the number of shares that normally trade each day, or the average daily volume.