My Favorite Stock Screener

With a universe of more than 13,000 stocks, it's impossible to be knowledgeable about all of them. Many readers have asked what screening tool I use to whittle the total down to a manageable number. There are many good free packages out there (see Jamie Heller's review of some of them), but I prefer a subscription service called ProSearch, which costs $49.95 a month after a 30-day free trial.

Among this package's advantages over some of its free competitors:

Prices and technical charting parameters are updated continuously, with no more than a 20-minute lag.
Fundamental data (earnings report information) are rarely more than a month old.
It offers many pretested searches that can be further modified accordingly to your own criteria.
Back testing is automatic.

The last item sets ProSearch apart from the pack. Depending on the stock market environment, screens will work well -- or not so well. In producing the results of a screen, ProSearch also produces a chart that shows how this screen performed each month for the past 12 months. A screen that consistently produces positive results over the entire 12 months is more useful than a screen that gives variable or even negative returns. You can develop "short" screens as well -- screens with consistently negative returns will generate good short-selling candidates.

ProSearch speeds the process of identifying good screens by running its library of dozens of preset screens nightly and ranking the best screens by returns over the past 12 months.

I typically start with a broad screen for liquid issues -- stocks with a share price above $10 or those on which you can buy options. I can then narrow the field by adding a variety of criteria. Below is a list of some growth-at-a-reasonable-price criteria that I plugged into ProSearch.

The stocks that turned up in this screen returned 48.5%, on average, over the past 12 months. In a tough environment for stocks, this screen focuses on companies with the means to survive, such as high cash flow and low forward price-to-earnings ratios.

Quite a few banks, including Bank of America (BAC - commentary - Cramer's Take), Bank One (ONE - commentary - Cramer's Take) and Sovereign Bank (SVRN - commentary - Cramer's Take) appear on this screen, which is not surprising; banks are traditionally high-cash-flow, low P/E companies. However, a number of beaten-down tech stocks such as Adaptec (ADPT - commentary - Cramer's Take), Micron (MU - commentary - Cramer's Take) and Kulicke & Soffa (KLIC - commentary - Cramer's Take) are also on the top of the screen, suggesting that some bottom-feeding is in order.

Not only does this screen make sense in the current environment, but it also has worked consistently over this tough past year, according to ProSeach's back-test chart.

How This Screen Fared Over the Past 12 Months

Source: ProSearch

You can change the parameters to find the best search over the past one to 12 months, but I find that the most reliable screens work over longer time periods. You can also use the canned screens, such as stocks with the best earnings momentum or those with a high dividend yield, as a starting point, then add additional criteria.

You can also use the site's "What's working best" analysis to find out what characteristics investors value most right now. For example, the searches that have worked the best over the past month all feature stocks with the lowest price-to-earnings, price-to-book and price-to-cash flow ratios and the highest cash-flow-per-share ratio. The safest stocks in an obviously bearish environment are the ones with these "value" characteristics.

The ProSearch system lets you immediately link to descriptions, stock charts and news about the companies that appear on screens. This is a useful time-saver because you can't just blindly buy or sell stocks based on screens. You have to do further research to make sure that a company is on a screen for a good reason. Philip Morris (MO - commentary - Cramer's Take), for example, is a company that often appears on value screens, but I still wouldn't touch the stock because of the permanent cloud of litigation overhanging the industry.

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David Edwards is a portfolio manager and president of Heron Capital Management,. At the time of publication, his firm held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Edwards appreciates your feedback and invites your feedback at [e-mail].