A Guide to Using Unfiltered Value Screens

By Matthew Foley

I spend a lot of my time staring at stock screens. They come in several different varieties, but I find that the most rewarding are often those that have the fewest filters possible.

It is pretty much standard procedure for people researching stocks to put in at least one or two filters designed to weed out ‘garbage’ stocks that they feel are only going to appear on their screen on a technicality. A good example of a filtered value screen would be Joel Greenblatt’s ‘Magic Formula’ screen. This screen sorts stocks for both earnings yield which is expressed as EBIT/Enterprise Value, and Return on Capital. In this case the filters to the Greenblatt screen are the top 50 stock ranking and the Return on Capital metric.

There is a lot to be said for filtered screens – I use them almost as much as I use the unfiltered screens. For those of us who like Benjamin Graham style cigarette butt stocks filtered screens have a lot of downsides. Mainly they filter out a lot of distressed stocks that we would like to research and quite possibly buy.

I’m going to demonstrate how to use an unfiltered screen by using the grahaminvestor.com NCAV (shares out) screen. This screen is fairly unfiltered – however it does allow us to sort by the various columns. This is hugely helpful.

First sort by OCF/share. You want the highest positive number to be the first choice. On 7/26 the first choice is Track Data Corp. Next we look for various pieces of information on each line.

Start with average volume. If this number is <1000 the stock is largely illiquid and the latest stock price may have nothing to do with reality. You can basically skip those stocks.

Next look at Price as a % of NCAV and market cap. If the stock is trading for pennies, the market cap is next to nothing, and the Price as a % of NCAV is under 30% you can reasonably assume that there is some kind of fraud that has been discovered. You can disregard these stocks as well.

It’s worth pointing out that for a stock to show up on this screen at all and show any kind of after tax profit at all probably indicates a fairly solid value opportunity. This means that you should be looking very hard at stocks that are trading for numbers over NCAV. Benjamin Graham wrote his seminal tomes in a time where the stock market was very depressed. This means that his expectations for a stock NCAV wise, while reasonable for his era, aren’t very likely to happen now without massive caveats. It’s worth noting that Graham told Buffett that he should stay out of the stock market game until the market returned to reasonable valuations. The Dow was at 200 at the time. When it came to margin of safety Graham was a bit of an extremist in my opinion.

It’s also an important point to realize that a stock screen is a starting point. Stock screens purpose is to direct your research- not do it for you. With unfiltered screens I expect to find at most 1 out of 25 stocks that I look into to be worth buying. The strength of unfiltered screens is that they are seldom used by analysts- and you can often find a ‘diamond in the rough’ that is a much better deal than what you would find on a filtered

For those who are interested I have a value investing blog that I update nearly daily. I hope to be able to provide more regular content to this site. I’ve been using grahaminvestor.com screens for years and am very excited to be able to share my perspective on some of the best value screens I’ve stumbled upon. Happy hunting everyone!