Create a filter to find good stocks

Criteria to find low risk stocks with high sales and earnings growth

  1. 5 year annualised sales growth to be greater than or equal to 20%. Sales growth in itself does not mean much if not accompanied by earnings per share growth. However, it is needed to find companies with the potential for earnings growth.
  2. 5 year annualised earnings per share growth to be greater than or equal to 20%. Earnings per share growth is the main driver of stock prices.
  3. Projected earnings per share growth to be greater than or equal to 20%. If earnings growth is projected to continue, the stock price may continue to increase.
  4. Debt as a percentage of total capital to be less than or equal to 33%. Although debt can be a good for companies with a high return on capital, limiting the debt to a small percentage of total capital will eliminate risky prospects.

The criteria set out above are guidelines to find low risk companies by virtue of a low debt to capital ratio. The lower the debt, the less risky a company is. Also, if these companies have been growing the sales revenue and earnings per share, chances are that they would be able to pay off their debt easily.  An options trader can use the filters above to find such companies and to initiate bullish positions on them. Do note that the criteria above is not set in stone. The criteria above is not set in stone. One can amend the search criteria above.

Criteria to find large companies which are industry leaders

  1. 5 year annualised sales growth to be greater than or equal to 10%. Larges companies usually grow sales at a slower rate than high growth companies.
  2. Projected earnings per share growth to be greater than or equal to 12%. For large companies, earnings per share growth is also slower than that is fast growing smaller companies.
  3. Sales revenue to be at least $6 billion. This filter here makes sure that large companies with sales revenue of at least $6 billion is selected.
  4. Market capitalization to be greater than or equal to $10 billion.
  5. Debt as a percentage of capital to be not more than 50%. The company should not be over indebted. This filter eliminates risky prospects.

The filters shown above can be used to find companies that have large market capitalizations but are still growing at a decent rate. These companies are also not overly risky and they have a fair amount of debt and good growth prospects.

Criteria to look for future high growth stocks

  1. The 5 year annualised earnings per share growth to be at least 10% or more
  2. The projected earnings per share growth must be at least 20% or more

The filters shown above are used to find possible future high growth stocks. As such, debt filters are not used to find out the risk that these companies have taken on.

Criteria to find high dividend paying stocks

  1. Dividend yield must be at least 4.5%
  2. Dividend payout must be less than 70%
  3. Debt as a percentage of capital must be less than 50%

The filters above are used to look for high dividend paying stocks. These are typically mature companies that are able to generate strong free cash flows and these businesses may not need large sums of capital expenditures to sustain its sales and profits.