Stock screening refers to a tool through which traders and investors sort out stock by considering certain criteria that a given user sets out (Akinde, Peter & Ikpefan, 2019). Notably, this criteria comprise of measurement of management strength and financial performance, valuation of ratios, historical volumes, and prices as well as market data. As such, stockholders would have control over the activities of the business (Christiana & Putri, 2018).
Moreover, stock screening remains considerably a socially responsible venture, given that shareholders choose stock depending on social or environmental issues (Kantarelis, 2018). Therefore, investors tend to be rewarded for companies that are considered to be socially responsible. This paper, therefore, seeks to establish various applicable style box to generate a 25 security portfolio which satisfies growth and value investing styles.
Imperatively, value screening entails the identification of a group of companies into which their market price remains relatively low compared with their value measures using dividends, sales, earnings, assets, and event cash flows (Kantarelis, 2018). Stock screening puts more emphasis on such measuring techniques as price-earnings, price-to-book-value, dividend yield, price-sales, and growth screening (Akinde, Peter & Ikpefan, 2019).
The current price-to-book-value ratio remains vital in establishing an average firm performance level, which in turn would be used in making a comparison with that of the industry market average absolute level (Christiana & Putri, 2018). Hence, the 25 security portfolio indicates that PT Indah Kiat Pulp & Paper Tbk had a higher price-to-book-value ratio of +200.00, which shows that more value had been created on the assets since they were purchased (Yahoo finance, 2020). It was further established that the price-to-book-value of the industry remained to be +3.15%, indicating that the stock portfolio of PT Indah Kiat Pulp & Paper Tbk under this style box was viable for investment (Yahoo finance, 2020).
Dividend Yield Emphasis
Dividend yield, fundamentally, measures the current dividend performance of the organization during a given financial period (Christiana & Putri, 2018). Accordingly, this would enable an organization to be able to determine its current dividend performance relative to the dividend yield of the industry, thus facilitating the decision-making process (Akinde, Peter & Ikpefan, 2019). Furthermore, if the firm’s absolute dividend remained below that of the industry average, then the decision should consider reducing the amount of dividend to distribute to the shareholders. This enables the organization to be able to create more wealth, which in turn would add value to the overall performance of the firm (Christiana & Putri, 2018). Among the 25 security portfolio, NVIDIA Corporation recorded a higher change in a dividend yield of +4.65 compared with the industry percentage change of +1.66 (Yahoo finance, 2020). This means that, on average, the performance of the firm was higher than that of the industry given that dividend yields are declared from the profits made during a particular year.
The price-to-sales ratio measures the growth rates besides profit margins (Akinde, Peter & Ikpefan, 2019). The organization, therefore, can determine their average profit margins performance vis-à-vis the overall performance of the industry (Yahoo finance, 2020). Hence, if the firm’s average historical level remained below the industry’s average, then it implies that the market share of the firm is gradually reducing, thus reduction in the sales level (Akinde, Peter & Ikpefan, 2019). Moreover, if the firm’s average price-to-sales ratio is higher than that of the industry, then it shows that the firm has more control of the market share. Accordingly, Amazon.com remains to have a higher price-to-sales ratio of +28.26 from the range of 25 security portfolio, while the percentage change was established to be +1.29 (Yahoo finance, 2020). This shows that Amazon.com was considerably a more qualifying stock portfolio for investing, given its higher ratio. Furthermore, it indicates that an average price-to-sales ratio of Amazon.com was better than that of the industry hence making it more viable for investment.
The firm uses its historical earnings to determine the current price-earnings ratios that remain fundamental in establishing its current performance level of the business (Akinde, Peter & Ikpefan, 2019). Further, the average earnings of the business are also vital in instituting an absolute price level of the business relative to the firm’s average historical ratio, market average performance, industrial norms, and growth rate, among others (Kantarelis, 2018). As such, a stock portfolio of Amazon.com Inc. indicated a higher price-earnings ratio of less than 10 of +21.43, which is considered slightly higher than the market industry ratio of +1.12 (Yahoo finance, 2020). Given this, Amazon.com Inc. stock must be better for investment from the range of 25 security portfolio (Yahoo finance, 2020). Moreover, it would ensure the availability of enough cash flows in the firm due to more current assets, which would facilitate decision making regarding current obligations to the firm.
This encompasses a measure of the potential earnings of the firm through the establishment of a minimum level of growth in both sales and historical earnings (Kantarelis, 2018). Under this style box, it focuses on evaluating profitability and companies’ operations over the years hence ensuring that profits remain higher than that of the industry while at the same time maintaining positive cash flow. Furthermore, it enables the organization to establish a strong return on equity as well as return on assets (Christiana & Putri, 2018). It further remains imperative that the financial strength of an organization measured in stock screening, given that it facilitates setting up maximum equity, capital, and debt assets ratio besides quick or current ratio.
Also, it determines the consistency of dividend payments by the company as well as financial leverage. Accordingly, Tesla Inc. recorded a percentage change from the range of the 25 security portfolio in net income of +55.71 during the financial year while the average net income for the industry was established to be +6.97 (Yahoo finance, 2020). This means that the firm remains more profitable, given that its price is considerably higher than the industrial market performance.
This entails establishing various organizations that are undergoing rapid expansion based on earnings performance (Akinde, Peter & Ikpefan, 2019). Moreover, it contemplates making investors focus more on the upsurge in prices. This would enable an organization to determine its growth in earnings per share through changes in growth rates associated with earnings during different seasons within a particular financial period (Christiana & Putri, 2018). Therefore, it remains imperative that the firm would be able to measure their growth in earnings relative to the average earnings of the industry. Accordingly, if the earnings of the firms remain below that of the industry, then it means that it is not viable given that the returns from this investment would be relatively low compared with that of the industry (Akinde, Peter & Ikpefan, 2019). As noted, Tesla Inc. had a higher stock value of +56.79 among the range of 25 security portfolios, while the growth screening rate for the industry was established to be +7.22 (Yahoo finance, 2020). This implies that the security qualifies for investing, considering that its growth rate remains to be higher than that of an average industry growth rate.
In conclusion, stock screening remains fundamental in a selection of viable security portfolios by an investor. Additionally, proper evaluation should be carried out on any stock of a given firm before deciding to invest in such an organization considering its average performance vis-à-vis that of the industry. This would enable an investor to formulate a sound decision-making process, which in turn reduces the chances of loss of funds after investing.
Akinde, M. A., Peter, E., & Ikpefan, O. A. (2019). Growth versus value investing: a case of Nigerian Stock Market. Investment Management & Financial Innovations, 16(1), 30.
Christiana, I., & Putri, L. P. (2018). Faktor-Faktor yang Mempengaruhi Price To Book Value Ratio. Kumpulan Penelitian dan Pengabdian Dosen, 1(1).
Kantarelis, D. (2018). Screening Stocks based on the Rational Approach to Decision-Making. Economics, Management, and Financial Markets, 13(1), 32-62.
Yahoo finance, (2020). Yahoo is now a part of Verizon Media. Retrieved 18 February 2020, from https://finance.yahoo.com/screener/new