In the rapidly changing equity markets of today, identifying the next promising investment opportunity is less reliant on intuition and much more a function of working with data. For UK investors keen to make possible moves and take advantage of possible shifts in market behavior, being skilled in how to use stock screeners will be crucial. Stock screeners help you sift through thousands of securities, isolate those securities that match certain characteristics, and then display a list of thought-promoting, friendlier names to quantify as potential researchers. In this guest post we will go through some considerations for why stock screeners matter, and how UK investors can successfully set themselves up to use them — and ways to combine signals from them with other macro commentary and research.
1. Why a stock screener matters for UK investors
Investing today requires processing an overwhelming amount of information — ranging from economic data to company fundamentals, sector rotations, and investor sentiment. UK-based investors even more so are trying to navigate currency movements, ongoing interest-rate policy from the Bank of England, and structural shifts brought about by Brexit. There have been discussions that it had risen considerably in London, indicating a background where active selection may provide better performance than passive holdings.
Think of stock screening as the filter you need to define criteria such as valuation metrics, growth rates, technical signals or sector-exposure, and have that custom criteria populate you a filtered list. Instead of comparing hundreds of charts or reading through companies reports to find a few companies with opportunities, you will have the screener manage most of the heavy lifting and target your further research on the most promising names.
2. Key criteria UK investors should include
When you open up a screener – for example via the popular stock screener tool – there are several filters you will want to customize. Here are five key core they should consider:
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Valuation filters:
Price to earnings (P/E), price to book (P/B) or enterprise value to EBITDA (EV/EBITDA) – this will help you spot companies that may be undervalued in relation to their peers or the market.
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Growth care:
Revenue growth, the growth of earnings, free-cash-flow expansion – A stock that is cheap but is not growth is likely to have issues, while a stock that is reasonably priced and is growing would likely receive more attention.
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Technical/price momentum:
While you can look for the next “market mover”, try to look for stocks that are breaking out above key moving averages, or have shown some recent volume bursts.
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Sector/market thematic exposure:
For a UK investor, sectors such as fintech, healthcare services, or renewable energy are all sectors that demonstrate differentiated opportunities. Articles have discussed how both fintech and the use of data intelligence will reshape the UK financial services sector.
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Liquidity/market access:
The last thing to confirm is whether the stock is liquid enough to trade without high costs to enter/exit, and if it is on the UK-broker account (some UK investors only trade US-listed stocks, while others only trade stocks that are UK-listed).
Now using the filters above you can begin to build a short-list of stocks that are cheap (or fairly valued), growing, technically breaking, and liquid.
3. Step-by-Step: Putting Together Your Screening Process
Here is a practical step-by-step guide for UK investors who would like to put this process into action:
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Open your screener:
This could be the screener from your stock screener tool, or screener provided by your broker.
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Select your universe:
Will you be screening UK listed stocks, US listed stocks available to UK investors, or both.
- Apply filters:
- Valuation – P/E < 20, P/B < 2
- Growth – 3 year CAGR revenue growth >10%, earnings growth next year >15%
- Momentum – price > 50 day MA (moving average), relative volume > average
- Sector – exclude heavily cyclical stocks if you are cautious, or focus on growth sectors
- Liquidity – (to avoid micro-caps) average daily volume > £5m (or equivalent)
- Sort your results
Once you’ve got your filtered list, choose a “better” metric (e.g. highest growth, lowest valuation) and filter down to 5-10 stocks for further research.
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Deep dive
For each name on your shortlist, deep dive into the business model, what has happened recently in terms of news, comments from management, insider buying/selling and macro tailwinds.
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Monitor and refine
Market conditions change. What worked last year, may not this year. Regularly review your screening criteria.
If you’ve never used a screener before, it may feel like you are working in a sea of data. But once you get the hang of when to use a screener, you can turn a long universe of stocks in to a manageable watch-list of stocks with high-valued potential.
4. How to interpret screening signals within context
A screener gives you names meeting your criteria – however, the next level is interpretation, within context. Here are some potential ways to frame what the output is telling you:
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Valuation relative to peer group:
A low P/E may result from a multiple discount – or may reflect structural challenges. You will want to do some qualitative research (i.e. review recent earnings calls) to confirm.
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Sustainability of growth:
A company may demonstrate high growth this year, but if the growth is a result of one-off factors, the next year may be disappointing.
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Technical breakout vs. false starts:
A stock, if breaking higher, is an interesting scenario to monitor – you will want to see volume, and wider market conditions. On occasion a breakout is simply the result of news, and not momentum or both.
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Tailwinds, both macro and sectoral:
For example; a slowing UK economy is likely to impact the headwinds even the best positioned growth stock faces, if included within the slowdown. Experts have stated UK inflation and interest-rates were influencing the investment outlook.
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Risk-management:
Even the best positioned candidate needs an exit strategy. Screening helps in stock-selection, but then defines how you will track the candidate’s progress, and then to define criteria for when to sell.
By viewing your screener results in this framework, you are converting a screen of potentially disparate raw data into a practical tool.
5. Typical pitfalls & how to avoid them
You now have a good sense of how powerful using a screener is – just use it wisely. Here are the most common pitfalls and how we avoid them:
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Too many filters
Too narrow of a list: If you add too many filters, you can end up with only a few or even no companies. Start broad and then narrow down.
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Ignoring liquidity:
A UK investor may head to a tiny listed local stock, only to realize there simply is no trading volume or illiquidity or wide bid/ask spreads.
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Over-reliance on past performance:
Growth and momentum filters are rewarding stocks for being “hot” or strong performance, but just because a stock moved upwards in the past, makes it no guarantee that it will continue to do this in the future.
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Neglecting macro/regulatory context:
The UK market operates under regulation (for example the Financial Conduct Authority) and currency movements. The UK has firms needing tech-savvy traders and illustrates broader structural changes in the markets.
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Failing to act on the list:
Screening provides you the list – however, you must conduct research and commit. You will not attain results with a long-watch list if you take no action.
6. Seizing opportunity: Shortlist candidate to next big mover.
Once you have screened your candidates and conducted your research, you can proceed to treat one or more of these as a watch-and-act opportunity. Here is a framing for doing so:
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Entry trigger:
Determine what will trigger you to execute a buy; confirmation of a breakout to the upside, beat in quarterly growth, sector rotation favouring the stock.
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Position sizing and risk:
Determine how much you will invest relative to the rest of your portfolio, and set a stop-loss level (for example a price below which you are not prepared to hold).
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Monitor your progress:
Use alerts – most all screeners will allow you to set either price, volume, and news alerts. Set a regular check-in on your progress.
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Exit plan:
Determine in advance the sales trigger, such as slowed growth, stretched valuation, or broken technical level.
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Portfolio integration:
Confirm this stock fits your overall strategy (i.e. how much UK vs international exposure you want, sector diversification, and risk appetite).
7. Conclusion
For the UK-based investor who wants to be ahead of the market moves, the skill of using a stock screener can be immensely valuable. It takes you from the reactive role to pro-active. Rather than chasing headlines, you are scanning/filtering/positioning ahead of moves. By utilizing filters for valuation, growth, momentum or sector as well as looking at them in the macro/sector context, a stream of anticipated potential “market movers” can be created.
A smart/appropriate use of the screener does not take away from the natural work of research, it adds to it. It will still require looking into the business, the risks you identify, and monitoring your positions. However, with so many potential investments, utilizing a screener provides an organization behind your inquiries to facilitate discipline and focus.
If you would like any help on customizing screening filters for the UK related to your investing your specific criteria (for example UK listed stocks as opposed to US listings for UK investors), let me know and I would be happy to assist you in building your customized screen.
