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a mechanical approach to a FOMO rally - theScreener

The Australian share market is trading near post-global financial crisis highs, frustrating defensively positioned investors. Underperformance is a looming, if not present, risk. If the Australian economy swings higher, any rally into year-end may not be so much a "Santa Rally", but a FOMO rally – driven by Fear Of Missing Out.

A common issue in many portfolios is a lack of growth-exposed investments. Portfolios have plenty of cash, term deposits, property, bank and utility stocks. The aim is to provide capital stability, well-placed for a high risk environment. However, if those risks don't eventuate, investors miss out, even at current lower growth rates. How can investors tilt such a portfolio towards growth stocks?

One answer is using available technology. Just three decades ago investors lucky enough to have a stockbroking account placed their order with their broker over the phone. The broker phoned the trading floor. Operators and dealers exchanged paper tickets that were later punched manually into a mainframe computer. The investor checked the price of their chosen stock by buying The Australian Financial Review the next morning, and a contract note arrived in the post about a week later.

Now, investors enter their order on their smartphone during a coffee break. They receive confirmation within minutes or seconds of their trade, and monitor their stocks live on the Financial Review website or a trading platform. Alongside this revolution in trade execution is an explosion in resources and tools available to investors. Despite comfort with automatic execution, many investors are yet to harness the power of technology in stock selection.

Most online share platforms offer a stock screener. Although some only look at chart-based signals, the better offerings include the ability to screen for fundamental stock factors. The best do both and are well worth looking at.

Fundamental screeners are usually flexible. Investors can look for the stocks based on characteristics they value most. A useful extra feature is a screener that filters for recent analytical changes – upgrades and downgrades. 

Good screening follows a logical order, recognising both market factors and individual portfolio needs.

Let's consider one process to screen for growth. It is an example only - but a fairly typical one - and some steps require investors to choose the attributes most important to them. 

In this example, a set of upgraded stocks is listed vertically, with columns for the various stock characteristics and measures. At the top of the long term growth estimate list are names like Aconex (51%), NextDC (49%), and ERM Power (42%).*

In most cases the columns are sortable. Clicking on the title of the column will order the companies by that measure alone in ascending order. Another click will reverse the order. 

If the column of forecast earnings growth is selected, the companies with the highest estimated earnings growth will appear at the top of the list. This is the starting point.

The next question is: to what extent does the stock price reflect this growth outlook? 

Some investors are excited about the US listed Amazon, particularly given the consensus long term growth forecast of around 28, according to Bloomberg estimates. However Amazon shares are trading at a record high of 185 times earnings. This gives a growth to earnings ratio (G/PE) of 0.15, well below a commonly used threshold of 1.0. Screening for a G/PE ratio of 1.0 or higher is a logical next step.

The shortened list is then subjected to an individual investor's criteria. Is the size of the company, measured by market capitalisation, a consideration? Is dividend yield still important? A comparison with global peers? A stock screener should give investors the power to select and sort stock by the relevant criteria.

The last step can involve the screener's own ratings. Many use a star rating system. The criteria include important factors such earnings revision, share price momentum, recent outperformance and a rising stock price. This is a sanity check, rather than a hard and fast guide, and can help. A three or even two star (out of four) rating is not a deal breaker, but a zero or one star rating may give pause for thought.

Screening for fundamental factors does not suit every investments style. But it sure beats a dartboard.

 *source: theScreener, CMC Markets Stockbroking standard platform

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