Defining Screening Criteria

To be more effective, the screening criteria should be set up to confirm that the selected companies are likely to realistically meet your objectives. A properly defined set of criteria statements will describe the characteristics of the companies you seek.

Set primary and secondary criteria to provide the most effective screening process.

Primary Objective

The primary screen defines what you are looking for and comprises the most important characteristic of your search (for example, growth).  This helps focus your search.  Determine what items describe the type of company you want.  Refer to the Data Item tables in the Appendix for ideas.

Try to avoid combining criteria that negate each other.  As an example, a search for fast growing companies should not include high yielding criteria.  This is because companies that grow quickly generally pay little or no dividend.  Such a search will likely produce poor results.

Secondary Validation

The secondary criteria statements should validate your primary search and help confirm that your primary objective is reasonable.  Often companies will have exceptional achievements that may be misleading.  The secondary criteria should substantiate that company achievements are sustainable.

Also use this approach when considering a secondary, less important objective along with your primary objective.

Here are a couple of examples to help clarify this idea.  These are meant to show the thinking process for building criteria statements.  Try this when devising your own search ideas.

Growth Example

Here the objective is to search for companies with growth characteristics for revenue and EPS. 

Hist 5Yr Rev Gr > .15

Hist 5Yr EPS Gr > .15

The above statements look for companies that have revenue and EPS growth greater than 15%.  The 5-year period is used because it focuses on the more recent information.

To ensure that the growth is 'legitimate' i.e. rather than irregular and uncertain, use the following statement to measure the consistency of year after year growth:

EPS R2 5yr > .95

To determine that the company is capable of achieving future growth, include the following statement that indicates the 'internal growth' potential:

Implied Gr > .1

Such implied growth identifies companies whose re-invested earnings can grow at least by 10%.

Lastly, include a statement to suggest that the company's management can continue to achieve the results you expect:

PTI Rating > 4

This says that the pre-tax income on sales (also called profitability) rates higher than 4 out of 7.

In summary, the first two items identify companies that have shown growth over the past 5 years.  The last 3 statements confirm that the growth is consistent and that the company achieved the results through its good management.

Safety Example

This safety example focuses on companies that can deliver income (through dividends).  The first two items identify primary criteria for the dividend.

Cur Div Yield >.05

Div Gr > .1

The example says first to look for companies whose dividend yield is more than 5%.  Then specify that the dividend is growing faster than 10%.

To ensure that these results are achievable, include confirming criteria to substantiate these primary objectives.  The secondary validations could be:

Hist 5Yr EPS Gr > .1

EPS R2 5yr > .9

Div Payout < .6

Here you ensure that dividend growth is achievable by testing for EPS growth greater than 10% (this should support the dividend growth of 10%).  Validate the growth by defining the consistency of the EPS growth using EPS R Squared greater than 90%.  Finally, test that the payout rate of earnings is low enough (less than 60% in this example) not to jeopardize the payment of future dividends.

Defining a Report

The report you define should follow your search objective.  Select report items that describe the type of company you are looking for. 

Include only items that you know and understand.  The best report is the simplest one that tells 'the story' for the company.

The advanced user may want to include more items in a report than a beginning user.  This will be a benefit when differentiating companies using weights (see below).

Additionally, reports should include items that 'describe' the company.  Some of these include company symbol, trading exchange, current price, latest quarterly EPS and revenue growth figures. 

Generally, items that are ratios provide a better comparison between companies than simple items like price, PE, sales, etc.  However, the simple items do give information about the company.  A balance of each type of item makes a good report.