Tag Archives: stock screens go wrong

When Stock Screens Go Wrong

When Stock Screens Go Wrong

What Happens To Your Portfolio When Stock Screens Go Wrong? Read this blog post to find out…

Stock screens are a great way to find new stock ideas. And I’ve even made quite a few videos about the best online stock screeners and how you can use the stock screener at finviz.com to. But there’s something you should know: sometimes stock screens go wrong!

So in this short blog post I will tell you why, as well as what you can do to avoid these costly mistakes.

The Reason Stock Screens Go Wrong

While stock screeners are a great way to find stock ideas that meet your investing or trading criteria, they aren’t the holy grail of investing ideas. In fact, they are simply a shortcut you can use to zoom-in on ideas that are interesting to you. And while this can save you time, like any shortcut, stock screeners don’t come without a little bit of risk. You see…

Whenever you go “off the beaten path” you  end up cutting some corners. And if you blindly bid on any stock, just because it came up in your stock screen, you are eventually going to make an expensive mistake. And the reason for that is pretty easy to understand (especially in retrospect).

Because as you obviously know…

Investing in publicly traded companies is a complex undertaking. And there are tons of factors that can influence the success or failure of a company and the corresponding stock price. So even if you screen for 10 or 15 different criteria, you still are not getting the whole picture. Stock screeners can never tell you everything. And by the way…

That’s coming from someone who loves stock screeners!

So the truth is:

Stock screens go wrong because they cannot understand forward looking phrases in annual reports. And they can’t assess changing macro-economic market conditions or flawed earnings estimates. No matter how you spin it, stock screens can go wrong in very costly ways because you can never screen for everything. And I know this because I’ve suffered this fate first hand.

So let me share a personal example with you to try and save you this painful and expensive mistake…

An Example of Stock Screens Gone Wrong

A few months ago, I did an analysis of Harris and Harris Group (NASDAQ:TINY). I found this stock after doing a stock screen and it appeared to match my target investment criteria perfectly. On paper, TINY was fundamentally very sound. And I was enthusiastic about the investment case for this nanotechnology venture capital firm. But that turned out to be a mistake. It was definitely a case of stock screens gone wrong.

Here’s Why The Stock Screen Failed Me:

Even though TINY stands up well against most of the metrics I use, such as debt-to-equity ratio and net cash per share,  TINY turned out to be a “value trap.” That’s because there were some criteria influencing the company that stock screens just couldn’t predict, no matter how I spliced and diced the data.

For example…

It turns out that TINY’s management is a little less than shareholder friendly. For the last 5+ years they have used the stock as their personal ATM. To make matters worse, they have been unable to make sizable returns on any of their portfolio investments. They have sold their shares too early. And on the rare occasion they did have a win, they failed to let shareholders participate in the spoils.

As a result, shareholders are angry and a deluge of selling has hit the stock over the last 6 months. To make matters worse, TINY was then delisted from the Russell-2000 index, which resulted in more mandatory selling by funds who track this index. This rebalancing has put a serious damper on the price performance of TINY stock… even though the “value” of the company appears great on many of my most reliable stock screens, the price performance has been atrocious. But here’s the thing…

Even though stock screens can and do go wrong, there are still good reasons to pay attention to them…

Why You Should Still Use Stock Screens:

Even though stock screens aren’t the perfect solution, they are still a great way to save time. As you surely know:

There are thousands of publicly traded companies out there. And if you try to comb through all of them one at a time you will run out of years in your life before you find a great investment idea.

On the other hand…

Stock screeners, like finviz.com, can really narrow down your area of focus and allow you to do thorough fundamental and technical analysis on a handful of stocks that have criteria that fit your investing style. So in conclusion:

Use stock screeners as a starting point to further research. Stock screens can provide you lots of “leads” on new and exciting stock ideas that fit your investing and trading style. But you need to do your due diligence and really put the stock tickers of interest through the analytical ringer. Otherwise you might get trapped, like I did on TINY.

So use stock screens as a starting point and you’ll cut hours off your research. But just be aware that you still need to read annual reports, understand the underlying assumptions baked into the earnings estimates and analyze what could go wrong. With this type of critical thinking you’ll be finding profitable investment ideas in no time.

And by the way…

Here’s an entire post dedicated to free stock screening videos — you can use them today to help get your stock idea research off on the right foot. Just make sure it’s not the only step you take!

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