The Problem with Absolute Stock Screeners


Stock screeners are the most useful stock analyzing tool offered by brokerages and investment companies. Stock screeners allow users to filter for stocks with given criteria, for example, only stocks with an earnings per share of $1 or larger. Researchers can filter across a variety of criteria to widdle down the massive stock universe to a list of shorter list of potential investment opportunities. Companies like VectorVest, Yahoo Finance and Finviz among many offer such services. These tools are often free, and rely on the user to understand stock fundamentals to determine criteria to create a filter that works.

If you would like to learn how to build an optimized stock screener, you can go here to learn about the free market insights methodology.


As great as Stock Screeners can be, they are still far from perfect and have a couple major flaws:

  1. Absolute market values change over time
  2. Stocks maintaining a majority of your characteristics are excluded but may be best investment

Lets take a look at each flaw in depth.


Absolute Market Values Change

When using a stock screener, you have to select fixed value data points that stocks either meet or do not. A great way to filter is, for example, to filter for stocks with an ‘above average’ ROA. ‘above average’ is defined as the current market average for all stocks today, which can change over time. Market earnings can grow or fall with time, thus using a market average found in some article that references the average in 2019, may not be applicable to today. What you really want is a RELATIVE criteria value. A value that ranks a particular stock against all of the other stocks in the market. This value should depend on the universe of stocks you are looking at. For example, if you have already filtered for high EPS stocks, it is likely that they will also have higher ROA, thus adding a fixed ROA criteria will be useless. what you really want is for a given universe of stocks, who has the best ROA, ROE and EPS combined, and this is not readily available using today’s stock screeners. At free market insights, we offer this additional perspective which is critical to identifying the best stocks in the stock universe.


Stocks that don't fulfill all criteria are excluded

Not every stock is perfect. it is extremely rare that a stock is cheap relative to the market and fulfills all the fundamental criteria that makes a company strong on paper. Lets take a theoretical example of a screener with 10 criteria. often times a stock may fulfill 8/10 of your criteria, be relatively cheap compared to the market and historical prices, and be a great investment. However, unfortunately these stocks are dropped from today’s stock screeners as they do not fulfill all 10 criteria. The only way to get this stock back into your screener is to loosen your criteria, but that unsustainably grows your potential investment pool and there may be no amount of tweaking that actually makes that stock show up. For example, a company may have a high debt/equity ratio, but be perfect on every other criteria. no matter how you adjust your debt/equity filter, it may never show up. To fix this problem, we need to assign a score to each criteria for every stock. we want to include all stocks in the universe, then assess their scores. this way, one criteria will not cause this stock to disappear and its other characteristics will surface the stock to the top. Today’s stock screeners do not offer this capability, which is why at Free Market Insights, we provide the stock scorer, which is the optimal way to screen for stocks.


Screeners have their value and Finviz is a spectacular tool for widdling down the investment universe. for example, you may only want stocks with a positive EPS. A stock screener can be used to identify those stocks, but from there, you want a relative scoring methodology to find the best stocks within that filtered universe.


Fortunately, with your FMI membership, you have that scoring methodology at your fingertips that will put you on top of the investing pool.


Happy investing!


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