Many traders use online screening services to search for value stocks, either to buy or to short them. During this exercise, the best results are achieved when the filtering criteria aren’t set to flag only the market extremities of very good value or very poor value. Such results are likely to be limited to only a few industry sectors, not a wide enough selection for intelligent analysis or diversification. Although it’s not necessary to keep the criteria so loose that every industry sector is represented, nor is it desirable to have too few.

Value stocks are defined as those that are undervalued by the market (or overvalued, in the case of short-selling opportunities). They should exhibit good valuation metrics, such as price to sales ratio (P/S), which is the most popular value filtering criteria. Others include the price to earnings (P/E) or price to earnings growth (PEG) ratios.

Although earnings growth isn’t the most important criterion for value stocks, it shouldn’t be overlooked. If strong earnings growth is present, it increases the stock’s value. However, a company should not be removed from consideration as a value stock if strong earnings growth is absent.

Value stocks can be located in any industry sector. Look for:
•    Closing share price above $1.00.
•    Average daily volume of 100,000 shares or more, to ensure adequate liquidity for trading.
•    P/S of 1.25 or lower, which marks the stock as cheap within the market.
•    Dividend yield of 1.0% or more. A value stock should pay some sort of dividend, but a payout of 10% often hints the company is overpaying and about to reduce its dividend, considered a negative surprise by the market.
•    Return on equity of 18% or greater, which indicates the company is efficiently operated.
•    Relative strength rating of 80 or more. This compares share price performance to the overall market, indicating this one is rising.

To diversify and balance the portfolio, short-selling opportunities should also be sought. Negative value stocks may be found in any industry sector, exhibiting poor price performance and delivering earnings disappointments to their investors.

Look for:
•    Closing share price above $1.00.
•    Average daily volume of 100,000 shares or more, to ensure adequate liquidity for trading.
•    P/S of 1.25 or lower, which marks the stock as cheap within the market.
•    Dividend yield of 1.0% or more. Again, a value stock should pay some sort of dividend, even a short-selling prospect.
•    Relative strength rating of 20 or less. This indicates the share price is underperforming the market and is ripe for shorting.

The companies returned by the screening service should then be analysed to determine if they’re appropriate for the trader’s portfolio.

Many traders state that the hairs on the backs of their necks simply rose at first glance of a likely stock, which isn’t as silly as it may sound. If the stock isn’t exciting, there’s little reason to trade it.

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