Needles in Giant Haystacks

Thursday, 5th December 2013 08:35 - by Moosh

Let me stop you there before you begin to conjure up images of someone trying to vaccinate a wrestler from the 80s.

Now, CONCENTRATE! Continuing with my Jam Today theme, if I was new to investing, then how would I find these profitable undervalued companies and how do I go about picking one to invest in? Two words - stock screeners - these allow you to look for companies based on particular fundamental or technical aspects which you are interested in and this is exactly what we shall be doing this session, using the Stock Picker tool here at London South-East. I will be brutally honest – this is the first time I have used this particular stock picker so it will be interesting (for me at least!) to see how user-friendly it is compared to others I currently use.

So let’s begin! By now, you should know what I want, right? How am I going to use this stock picker to find me a potentially undervalued profitable company? A PE ratio less than 10 may suggest a company is undervalued, but I want even more of a bargain so I will look for companies with a PE ratio below 8. Now follows the interactive bit, if you wish to play along.....

1. Open up a new window in your internet browser then type in the homepage for LSE: http://www.lse.co.uk
2. Click ‘Share Prices’ in the menu on the left side
3. Click ‘Stock Picker’ in the menu on the left side
4. In the ‘Add Parameter’ box, choose ‘PE Ratio’ from the drop down menu, then click the blue ‘Add Parameter’
5. In the ‘PE Ratio’ section choose the ‘< Less than’ option from the drop down menu, then type ‘8’ in the right box
6. Change the ‘Show rows’ box to ‘100’ from the drop down menu
7. Next to ‘Sort by’, choose from the drop down menus, ‘PE Ratio’ (left box) and ‘Descending’ (right box)
8. Click ‘Search’

In this example I have only searched using one parameter, but if you want to pick companies using multiple parameters then go back to step (4) and choose whichever extra parameters are required for a more comprehensive search.

I now have a list of companies from all sectors which should have a PE ratio of below 8; but what if I was only interested in companies from the Oil and Gas sector? Is there a slightly easier way to work out which ones are from this sector rather than having to click on each company one by one? Simple answer – yes...

1. Open up a new window in your internet browser and type in the LSE homepage: http://www.lse.co.uk so now you should have two tabbed windows open – the current one and the one with the stock picker results on it
2. Click on ‘Share Prices’ in the menu on the left side
3. Click on ‘UK Industry Sectors’ in the menu on the left side
4. Click on ‘Oil and Gas Producers’ from the list
5. Click on ‘Oil and Gas Producers Sector Constituents’
6. Now you can see which results from the stock picker appear on the list of Oil and Gas Producers

That takes less than a few minutes to do but unfortunately this is only the start of researching fundamentals. We have a few ‘needles’ but now need to find which one is the sharpest. There needs to be a much deeper look at the fundamentals, especially to see if any of the companies have growth potential in the medium term. It is also useful to check the basis on which the earnings (and therefore PE ratio) were acquired. It may be that a company with no recurring long term revenue has received a substantial one-off lump sum payment which could yield a profit on a full year basis to give a PE ratio, but this would inevitably be a ‘false’ result so it is always necessary to double check the results of any stock picker in more depth to see exactly how the figures are arrived at. Another disadvantage of the stock picker (at least for the purpose of PE ratio), is that it will create results based on the latest full financial year data, which may actually miss some companies which have turned around their operations for the better in the current year, but those won’t be officially apparent until the final results are released. Of course, the current year will have trading updates and interim results released throughout so for these companies, a stock picker may not be useful at all, and to find these you would likely have to plough through each company one by one.

So is my glass half full or half empty after my stock picker experience? Actually, my glass is two thirds full since if I wasn’t particularly bothered about investing in a specific sector, then my results list from the above offered a wide range of companies from which to use as a stepping stone to further research.