Upload
clinton-martin
View
212
Download
0
Embed Size (px)
Citation preview
1
Chapter 10
Security Screening
Portfolio Construction, Management, & Protection, 4e, Robert A. StrongCopyright ©2006 by South-Western, a division of Thomson Business & Economics. All rights reserved.
2
Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity.
General George S. Patton
3
Outline
Introduction Why Screening is Necessary What Constitutes a Good Screen? Sources of Information Screening Processes Examples of Commercial Screens
4
Introduction
Security screening involves reducing the security universe down to a manageable size
Picking stocks is an art rather than a scienceThere is no single best way to choose individual
investments
5
Why Screening Is Necessary
Time Constraints Everyday Examples of Screens
6
Time Constraints
The NYSE and AMEX, and Nasdaq list thousands of potential investmentsThere is no time to analyze every security and
process the associated information
Many people never develop a well-conceived way to deal with the information overload
7
Everyday Examples of Screens University Admission Test The Football Team
8
University Admission Tests
More people apply for admission than are ultimately admitted
Universities use two steps:An initial screenCloser individual scrutiny for those passing
the first round
9
The Football Team
More players try to join the football team than the rosters can carry
Coaches may use screens:40-yard dashes for running backsBench presses for offensive linemen
10
What Constitutes A Good Screen? Ease of Administration Relevance and Appropriateness Acceptance by the User Ordinal Ranking of Screening Criteria
11
Ease of Administration
The screen should be easy to administer and implement
e.g., narrow stocks down to thinly traded stocks by using The Wall Street JournalThin trading refers to a security with a
relatively small number of shareholders and a lack of trading volume
12
Relevance and Appropriateness Screens should logically have something
to do with the ultimate objective
For example, start at the top of the NYSE listings with your screen
13
Acceptance By the User
Screens lose value if people fundamentally disagree with it
For example, people may not believe in SAT scores as a screen for admission
14
Ordinal Ranking of Screening Criteria Use a screen pecking order for multiple-
stage screening:The first screen is the one that eliminates the
most alternatives
The second screen eliminates the next highest number of alternatives, etc.
15
Sources of Information
Value Line Standard & Poor’s Mergent Brokerage Information Internet
16
Value Line
The Value Line Investment Survey:Follows 1,700 common stocks
Rates each stock in two categories: Timeliness: the advisability of buying a stock now Safety: a measure of potential risk with a stock
Many market analysts attach considerable significance to the Value Line report on a stock
17
Value Line Timeliness & Safety Ranking System
RankingNumber of Stocks with This Ranking Meaning
1 100 Best
2 300 Above average
3 900 Average
4 300 Below average
5 100 Worst
18
Sample Value Line Report
Source: The Value Line Investment Survey, December 10, 2004. Copyright © 2004 by Value Line Publishing, Inc.: used by permission. For subscription information to the Value Line Investment Survey, please call (800) 634-3583.
19
Standard & Poor’s
Stock Report Stock Guide
20
Stock Report
The S&P Stock Report is a one-page document that: Is updated quarterlyContains a description of a companyContains an estimate of what the future holds
for a companyContains financial statement information,
dividend payment dates, beta, and other risk measures
21
Sample S&P Stock Report
Source: Standard & Poor’s Stock Guide (New York: Standard & Poor’s Corporation, 2004): Reprinted with permission.
22
Stock Guide
The S&P Stock Guide: Is a monthly publication
Contains summary statistics on common stocks, convertible preferred stocks, warrants, and mutual funds
Is a companion to the Bond Guide
23
Sample S&P Stock Guide
24
Mergent
Mergent’s Manuals Mergent Dividend Record
25
Mergent’s Manuals
Mergent’s Manuals:Were formerly “Moody’s manuals”Contain seven sets of volumes covering
industrial firms, public utilities, over-the-counter industrials, transportation issues, and bank/finance issues
Include the Company Archives Manual, which provides data on defunct companies since 1996
26
Mergent Dividend Record
Mergent Dividend Record:Contains information on the recent dividend
history of a company, including: Payment dates
Ex-dividend dates
27
Brokerage Information
Brokers can be a good source of information
All full-service brokers have the ability to provide their customers with stock research
28
Internet
Examples of good sources:http://finance.yahoo.com http://www.smartmoney.comhttp://www.morningstar.comhttp://www.fool.comhttp://www.bloomberg.com
29
Yahoo!® Finance
30
Screening Processes
Multiple-Stage Screening Subjective Screening Screening with the Popular Press Only A Quick Risk Assessment Screen with the
Stock Report
31
Multiple-Stage Screening
Most investment applications require several screening stagese.g., earnings per share by itself is not very
useful
e.g., in choosing a growth stock, it would not make sense to search initially for those with the highest dividend yield
32
Subjective Screening
Not all screens need to be quantitative
For example, socially responsible investing:Tobacco stocks, nuclear power, animal testing,
the environment, human rights, etc.Best of class investing recognizes that all
firms can be faulted in some way and looks for “role models” within each industry
33
Screening with the Popular Press Only Price/Earnings Ratio Dividend Yield Stock Price Exchange Listing Familiarity 52-Week Trading Range Options Availability
34
Price/Earnings Ratio
Low PEs are good: Investors pay little to get a lot
High PEs are good:The efficient marketplace anticipates that
future earnings will be higher than those of the past
35
Dividend Yield
Dividends do not materially alter a recipient’s wealth
People like to receive dividends:Strokes the ego Important for income or growth of income
objectives
36
Stock Price
Some people believe in an optimum trading range for stock prices
The cost of a share should be merely a market
People prefer to avoid odd lotse.g., investing $2,000 means the stock price
cannot be higher than $20
37
Exchange Listing
Some clients may want to restrict their investments to a particular exchange:AMEX
NYSE
Nasdaq
38
Familiarity
Invest in companies that you know something about
Familiarity is a subjective criterion
39
52-Week Trading Range
“The stock is trading at the low end of its annual high and low”
If the market is efficient, annual highs and lows are of no value in predicting future prices
40
Options Availability
Some people invest in equity issues that have options available because they are versatile
Options information is contained in the financial press
41
A Simple Financial Pages Stock Screen
42
A Quick Risk Assessment Screen with the Stock Report ROA and ROE Evaluating ROA and ROE
43
ROA and ROE
The Stock Report contains ten-year histories of ROA and ROE:Useful for a quick comparison of companies:
ROA is net income after taxes divided by total assets
ROE is net income after taxes divided by equity
If the firm has debt and positive earnings, ROE will exceed ROA
44
Evaluating ROA and ROE
A “good, safe investment” has a history of stable ROA and ROE figures, with ROE somewhat higher than ROA
If ROE is substantially higher than ROA, the firm is heavily leveraged (risky)
45
Examples of Commercial Screens Published Paper Data Computerized Data
46
Published Paper Data
Value Line Publications
47
Value Line Publications
Timeliness and safety rankings are one of the most widely used screense.g., limit stock picks rated either 1 or 2 for
timeliness
Identifying attractive stocks is a process called sector screening
48
Computerized Data
Value Line Investment Analyzer Compustat
49
Value Line Investment Analyzer A 7,500-security database
Can be screened by more than 300 variables
Can be used to prepare statistical summaries and detailed tabular reports
50
Compustat
Used by academic researchers Available for mainframes and
microcomputers Variables include:
Current ratioRetained earningsUnfunded pension liabilities