After Hours is an editorial column more loosely covering our opinions on a variety of topics in finance.
The ugly truth is that it is impossible to go through the financial statements of all available companies in the world’s stock exchanges. There is just not enough time. And although the potential for reward could be higher if you sift through each and every one, that would still mean sifting through a lot of dirt.
This is where stock screening comes in. It’s just easier and more straightforward. You pick a few criteria, making sure none are too restrictive, and then you exclude any stocks that do not meet this criteria. It is neither the most graceful practice nor the most thorough, but it quickly cuts down your universe of stocks to a smaller, more manageable group.
We have adapted some criteria borrowed from Chapter 14 (“Stock Selection for the Defensive Investor”) of Benjamin Graham’s The Intelligent Investor to serve as a starting point for any who wish to employ stock screening into their investment research process.
Debt-to-Equity Ratio must be less than 1.0.
Total Debt-to-Net Working Capital Ratio must be less than 1.0.
Current Ratio must be more than 2.0.
Company must have consistently paid out annual dividends over the last ten (10) years.
Net Income must have grown by at least 33% compared to ten (10) years prior.
Continuing with the stocks retained from our first screen, presented below are all the common stocks listed on the Philippine Stock Exchange (“PSE”) also meeting the following criteria:
Net Debt-to-Net Working Capital (“ND/NWC”) Ratio below 0.6 for property, mining, and oil companies and 0.9 for all other sectors
Capital Adequacy Ratio (“CAR”) above 15.0% for banks
Non-Performing Loan (“NPL”) Ratio below 4.0% (gross) or below 2.0% (net)
Last Traded Price not higher than 25.0% from 52-Week Low
All financial data was retrieved from the companies’ latest audited financial statements for the quarter ended September 2021. All prices were retrieved at market close on December 9, 2021 (GMT +8).
The above screening criteria was adapted from the following excerpt from Chapter 14 (Stock Selection for the Defensive Investor) of The Intelligent Investor (Revised Edition) by Benjamin Graham:
“For industrial companies current assets should be at least twice current liabilities—a so-called two-to-one current ratio. Also, long-term debt should not exceed the net current assets (or ‘working capital’). For public utilities the debt should not exceed twice the stock equity (at book value).”
The ND/NWC Ratio was used in lieu of the Long-Term Debt-to-Net Current Assets Ratio to provide even more stringent parameters in response to uncertainties surrounding the ongoing COVID-19 pandemic. Net Debt was computed by subtracting total cash from total debt. Net Working Capital was computed by subtracting current assets less cash by current liabilities less debt. An ND/NWC Ratio of 0.6 was required for companies in property, mining, and oil to provide a wider margin-of-safety given the potentially more vulnerable and capital-intensive nature of these industries.
For banks, a CAR of 15.0% and an NPL Ratio of 4.0% (gross) or 2.0% (net) was required in lieu of the ND/NWC Ratio.
Companies trading at more than 25.0% over their 52-Week Low were also eliminated. This extra screen was adapted from the following excerpt from a 2000 MSN Money article by famed “Big Short” Michael Burry:
“As for when to buy, I mix some barebones technical analysis into my strategy—a tool held over from my days as a commodities trader. Nothing fancy. But I prefer to buy within 10% to 15% of a 52-week low that has shown itself to offer some price support. That’s the contrarian part of me.”
Last Traded Price
Asia United Bank Corporation
China Banking Corporation
Metropolitan Bank & Trust Company
Rizal Commercial Banking Corporation
* Net value used in lieu of gross value due to lack of coverage