1 / 49

Chapter 11 Security Screening

Chapter 11 Security Screening. Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity. - General George S. Patton. Outline. Introduction Why screening is necessary What constitutes a good screen? Sources of information

nadine
Download Presentation

Chapter 11 Security Screening

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Chapter 11Security Screening

  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 science • There 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 investments • There 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 Test • More people apply for admission than are ultimately admitted • Universities use two steps: • An initial screen • Closer 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 backs • Bench 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 Journal • Thin 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 second-most 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: the confidence Value Line analysts have in their forecasts about the firm • Is followed closely by many market analysts

  17. Value Line Timeliness & Safety Ranking System

  18. SampleValue Line Report

  19. Standard & Poor’s • Stock Report • Stock Guide

  20. Stock Report • The S&P Stock Report is a one-page document that: • Is updated quarterly • Contains a description of a company • Contains an estimate of what the future holds for a company • Contains financial statement information, dividend payment dates, beta, and other risk measures

  21. SampleS&P Stock Report

  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. SampleS&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 • The Mergent Dividend Record: • Contains information on the recent dividend history of a company, including: • Payment dates • Ex-dividend dates • Etc.

  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: • www.thomsoninvest.net: contains consensus earnings estimates and a stock screener • quote.yahoo.com • www.smartmoney.com • www.morningstar.com • www.fool.com • www.quicken.com

  29. Quote.Yahoo.Com

  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-State Screening • Most investment applications require several screening stages • E.g., EPS by itself is not very useful • E.g., dividend yield should not be the only screen for growth stocks

  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.

  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 lots • E.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 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, 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 • Value Line publications • Computerized data

  46. Value Line Publications • Timeliness and safety rankings are one of the most widely used screens • E.g., limit stock picks rated either 1 or 2 for timeliness • Value Line Investment Survey can be used for sector screening • Contains industry rankings

  47. Computerized Data • Value Line Investment Survey for Windows • Compustat

  48. Value Line Investment Survey for Windows • A 7,500 security database • Can be screened by more than 200 variables • Can be used to prepare statistical summaries and detailed tabular reports

  49. Compustat • Used by academic researchers • Available for mainframes and microcomputers • Variables include: • Current ratio • Retained earnings • Unfunded pension liabilities, etc.

More Related