Stock screening and analysis process

My typical day is spent at work, this is followed by a couple of hours with the family. Once the basic stuff of living is also built in, eating, cleaning, exercising, there isn't a whole lot of time left for analysing stocks. So to make this more manageable, over the last 6 months or so I've been building some stock screeners, and thinking hard about the most efficient analysis that I can do to enable me to isolate those stocks that I am interested in.

Since my analysis is going to be somewhat limited by time, my intention is to ensure my portfolio is diversified across industries, sectors, and geographies (starting portfolio here and here). My interest is more in quality defensive stocks paying a reasonable dividend, rather than highly cyclical businesses such as commodities. I also want to invest in a business that I understand (albeit a rather basic grasp of what's going on - based on the business' internal and external reporting). This diversification will hopefully remove some risk, but I will also be investing a small % of the portfolio into each stock, in the hope that should I make a mistake it's not going to cripple my returns.

So, limited by time, I've tried to develop some tools and a process that will help make this work. The idea is to push out the greater time investments until I've already done a few basic checks on the business...

Step 1 - 5yr screen
My screening process is going to be aimed at reducing risk, whilst trying to identify quality business. So my first step is my initial screen in which I ask a series of questions of a business based on a few figures from the past 5yrs accounts. This includes looking at some aspects of growth - e.g. are revenues and profits increasing, the consistency of that growth, debt, ROCE etc.. All of which is boiled down to a score out of 10.

5yr stock screener

Businesses at the end of a long upward cycle, such as house builders show up as having a high score, so I tend to disregard those highly cyclical stocks with a high score. Arguably those with a very low score are of more interest as they may be at the bottom of their cycle.

As you can see Mondi scores favourably, and whilst not a typically defensive stock, it has some defensive qualities, and has a couple of tailwinds from both ecommerce and a move away from plastic packaging, which prompted some of my interest to dig a bit more.

Inevitably I will screen out some good businesses doing this, but my hope is that I will also remove those I consider have risks that are too high.

Time to complete 5yr check: 0 minutes now the screen is built

Step 2 - 10yr numbers
Having found a stock in which I am interested, I then pull out a range of figures from the last 10yrs of accounts. I'm here trying to review and cross reference multiple data points to inform me about the health of the business, and also the extent to which it has been growing. I also dig into margins, ROCE, debt profile, acquisitions, capex etc. in a bit more detail. I like to be able to visualise what's going on so I throw in a few charts to help.

Mondi debt vs cash

Again this is for Mondi - doesn't show much on it's own, but can be used with other measures to build up a picture of the health of the business.

Time to complete 10yr check: 20 mins

Step 3 - quality & price
If the stock makes it through the 10yr number crunching and still looks attractive -  or at least, not a basket case it gets added to the list of potential purchase candidates. A range of the results from the 10yr analysis are captured and compared to all of the other candidates.

Quality vs price - Mondi

From the various factors I've considered, Mondi, Next and Greggs all come out with a similar overall score, all very different businesses with different factors driving the scoring - in this case Next has better price vs cash flow, Greggs has less debt, Mondi has a higher dividend. By squashing many factors into a single result, I can get a view of potential investments assessed against the same benchmarks. And since price drives a number of these, such as PE, dividend yield etc. it has a significant bearing on how appealing the stock looks.

Time to complete quality vs price: 5 mins (most of the heavy lifting is already done)

Step 4 - qualitative review
Finally having got bamboozled by a load of numbers, I'll then wander off to do a bit of reading. I want to ask a whole lot of questions, related to how the business is run, how they make money, whether they are likely to continue to make money...all of which ends up in a completed checklist. But to complete this requires digging out specific details from the annual reports, company website, analyst views etc. which all ends in yet more scoring.

Qualitative checklist - Mondi

As with previous steps, this helps compare very different businesses against the same criteria. In this case - using Mondi as an example again, it's shown good growth and potential for continued growth, is relatively low risk, although I'm less happy with some of it's strategic elements.

Time to complete qualitative review: 3-4hrs

So there it is. All parts of this will need maintaining, review, refining, adapting...but I'm relatively happy with it. If there is a stock out there that does appeal that I can't do this with, I'll simply invest a smaller amount (e.g. my recent purchase of Manx Telecom), or I need to get equally comfortable via other means. Putting together these tools and process has already thrown up a number of surprises, stocks I'll be digging into which I wouldn't otherwise have looked at. Fun times...

(In case you're interested, Mondi is on the list of potentials and might well make it to the portfolio if it meets my preferred price.)