In this example, we’ll try to find out undervalued stocks with strong fundamentals. We’ll be using four parameters for our example.
You can pick the metrics and parameters, based on your preference while creating a screen.
The first parameter we’ve used is PEG Ratio < 1.
Why? The PEG ratio combines the P/E ratio and Growth Rate, by dividing the P/E ratio by the expected growth rate in earnings.
If the PEG ratio is less than 1, it implies that: The stock's price might not fully reflect its growth potential.
For example, if a company has a P/E ratio of 15 and an expected earnings growth rate of 20%, the PEG would be 0.75 (15/20). This suggests you're getting growth at a discount.
Next, we’ll use the parameter P/B < 1.5.
We use this metric to find stocks that are trading at a discount to their intrinsic or book value, hoping the market will eventually recognize the company's true worth.
[Note: a low P/B could also indicate issues like declining profits or market pessimism about prospects, so it's crucial to dig deeper and not rely solely on one parameter in your strategy.]
Next, to ensure our earlier parameters don’t filter stocks with poor financial strength, we’ll use a parameter to filter out strong financial companies, i.e. the Piotroski F-Score > 6.
A score over 6 means a company does well across most of these dimensions, indicating robust financial health.
Last, we will use the EV/EBIT < 12.
An EV/EBIT ratio below 12 suggests that the company's operational earnings are relatively high compared to its total valuation, potentially indicating an undervalued opportunity
Let’s hit ‘Run’ and see how many stocks are filtered with our parameters.
5 stocks qualify. We will now see the backtest results.
More than 5 times the benchmark index. As always take every screener created here with a pinch of salt and don’t blindly follow this or any screen.
We should always do our due diligence as each investor has different viewpoints, risk appetite, and investment strategies.