The Standard & Poor’s Guide to Selecting Stocks by Michael Kaye is a very solid book that focuses on the basics of stock screening. Various stock screen will yield various type of investing options depending on what one is looking for (ie growth, value, dividends, momentum, etc). Be aware that stock screening allows investors to find a list of stocks based on various financial parameters (forward P/E ratio, cash flow, market capitalization, return on equity, etc) input by the user, but does not mean that every stock returned from the screen is a winning investment option. Kaye emphasizes that screening for stocks is the first step in the investment process and should be used as a tool to keep investors informed on what options they have.
One thing I found really interesting in his screens is that in his investment screen for GARP, growth at reasonable price, many of the companies that were derived were housing stocks like Hovanian (HOV), Toll Brothers (TOL), The Ryland Group (RYL), Pulte Homes (PHM), and Centex Corporation (CTX). Some of the screening parameters included a PEG ratio of between 0 and .75 with a return on equity of at least 20%. These housing companies are nowhere near their highs from years back and still are looking for a bottom so this is an example that stock screens need to be properly evaluated even if they look like good investments at the time. Another interesting screen looked for value stocks that have a high rate of insider purchasing. One of the ten stocks returned from that screen was Las Vegas Sands (LVS) and the price was at 42.85 at the time. Holding until today would have yielded a 300% gain so sometimes it really is worth taking a gamble but using a stock screener can help allow you to take a calculated gamble while lowering your risk.
Amateur investors or experienced investors can get a lot from this book.
a) Beginners: They will find a way to learn about companies that meet their investment themes, and decide whether the company is worth researching more about.
b) Experienced: These people will already have stock investments in mind and stock screening can allow one to find out if there are better investments available. Screening needs to be done continuously, whether it’s on a weekly or month basis, because stocks that are returned from a screen will always be changing.
Things to try on your own after getting this book:
1) Based on Kaye’s stock screens in late 2004, see how the stocks returned from the screens are doing currently
2) If you like a particular stock screen, put some of the financial inputs from his stock screen to see what companies would turn out today
Overall grade: A-
I didn’t read through chapter 11 (screening for mutual funds) or chapter 12 (screening for bonds) as my main focus was to learn about screening for stocks. The first 100 pages of this 229 page book gives a very comprehensive overview of various stocks screen with many examples of each type. Again, use this book as a tool for investing and not as a magic list of stocks.