Assignment: Value and Growth Screens
Submit One (1) Hard Copy per Team
VALUE SCREENS -
Value investing is a disciplined investment approach using valuation measures that help to avoid the emotional traps of the market. Stocks and markets are driven by emotions that often push prices from their intrinsic value. The value strategies seek to profit from other investors' misjudgments by seeking stocks that are out-of-favor or neglected by the market and by avoiding the high-flying fashionable stocks that have been swept up by market euphoria. Eventually the market rediscovers out-of-favor stocks and lets the high-fliers fall back to earth. This is why value investing is sometimes called contrarian investing.
Value investing selects stocks that are priced low relative to measures of worth, such as sales, earnings, operating cash flow, assets and equity. Common measures of value include low Price/Earnings, Price/Sales, low Price/Free Cash Flow, low Price/Book ratios (i.e. Price/X ratios) and high Dividend Yields. This is not to say that all firms with lower Price/X ratios or high dividend yields are good values. To be a good value, they must be able to show some potential. Realize that many stocks with low Price/X ratios have little potential and deserve their low multiples!
Refer to the AAII article, "Constructing Winning Stock Screens" by John Bajkowski to create YOUR OWN value screen using a stock screener of your choice. See the article "5 Best Free Stock Screeners" for a selection. Keep your screen simple. Use three (3) primary criteria and three (3) secondary criteria in your screen. As a general rule, the more criteria you specify and the stronger (the more limiting) your criteria, the smaller will be your sample of stocks that pass your screen.
Q1. Base on "Constructing Winning Stock Screens" LIST both the primary and the secondary criteria you have selected for your screen. Make sure that you clearly define each criteria as being primary or secondary.
Q2. LIST the total number, not names, of firms that your screen generates.
Q3. Select what you believe to be the best two (2) firms from your list for further valuation analysis. EXPLAIN why you have chosen these two firms (i.e. over the past several years they may have the strongest sales growth, earnings growth, consistent profit margins, other information found in news articles, etc. of the low Price/X ratio firms that were generated by your screen ). In addition, analyze the 20-day price and volume trends for both of these firms as you did in Assignment 1. PROVIDE the names of these two firms in your report. DESCRIBE their products and/or services that they offer.
GROWTH SCREENS -
Growth investing is concerned with selecting stocks that will exhibit above-average and increasing growth rates in sales and earnings with still-reasonable profit margins. Minimally, growth companies are growing above the rate of the overall economy. Practically speaking, however, the benchmark for being classified as a growth stock is a 15% to 20% annual growth rate in earnings per share. Stocks with high growth and good prospects attract a great deal of attention. Price tends to be bid up with high anticipation. As such, high expectations relative to current levels of earnings lead to high price-earnings, Price/Earnings, ratios along with high Price/Sales and Price/Book Value ratios. It is not uncommon to see highly touted growth stocks with Price/Earnings multiples two to four times the market.
As in Q1, refer to the AAII article, "Constructing Winning Stock Screens" by John Bajkowski to create YOUR OWN growth screen. Keep your screen simple. Use three (3) primary criteria and three (3) secondary criteria in your screen. As a general rule, the more criteria you specify and the stronger (the more limiting) your criteria, the smaller will be your sample of stocks that pass your screen.
Q4. Base on "Constructing Winning Stock Screens" LIST both the primary and the secondary criteria you have selected for your screen. Make sure that you clearly define each criteria as being primary or secondary.
Q5. LIST the total number, not names, of firms that your screen generates.
Q6. Select what you believe to be the best two (2) firms from your list for further valuation analysis. EXPLAIN why you have chosen these two firms (i.e. over the past several years they may have the strongest sales growth, earnings growth, consistent profit margins, other information found in news articles, etc. of the high Price/X ratio firms that were generated by your screen ). In addition, analyze the 20-day price and volume trends for both of these firms as you did in Assignment 1. PROVIDE the names of these two firms in your report. DESCRIBE their products and/or services that they offer.
"Remember, screening is a multi-step process. The first step is to apply the quantitative filters to the stock universe to help you arrive at a set of candidates that all share the same base set of characteristics. This doesn't necessarily mean they are all good investments. It is important to take your list of passing companies and, at a minimum, perform some cursory qualitative analysis to decide whether or not they are right for your stock portfolio." - Wayne Thorpe, AAII
Attachment:- Assignment Files.zip