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Selecting Stocks From a Screen

I’ve long been a fan of stock screens. They filter a database to identify stocks with specific traits. A value screen may identify stocks trading at low price-earnings (P/E) ratios with above-average levels of return on equity (ROE). A growth screen can find stocks that consistently grow profits and are projected to continue doing so in the future. All stocks added to AAII’s model stock portfolios are found through stock screens.chart

A challenge with stock screens is identifying which of the passing stocks to buy. There are two primary approaches to making this decision, and I’ll discuss both. (The second approach I’ll discuss is the one used at AAII.)

The first approach is to simply buy everything passing the screen. This approach has been called mechanical investing, though it now falls under the broader arena of what is known as quantitative (or simply “quant”) investing. Stocks are purchased when they pass the screen. The portfolio is then rebalanced at preset intervals or adjusted according to predefined rules. The rebalancing involves selling the stocks that no longer pass and adding the new ones that do pass. This approach takes human emotions and judgment out of the buy and sell decisions. (Biases and other cognitive errors still do influence the creation of the screen and the implementation of the rules.)

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AAII Sentiment Survey

Optimism rebounded but remains below average for a fourth consecutive week. Plus, this week’s special question asked members what they thought about Apple Inc. (AAPL) being worth $1 trillion. More about this week’s results.

This week’s results:
  • Bullish: 36.4%, up 7.3 points
  • Neutral: 32.6%, down 6.2 points
  • Bearish: 31%, down 1.0 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.


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The Week Ahead

Second-quarter earnings season will start to shift toward retailers with Home Depot Inc. (HD) and Walmart Inc. (WMT) reporting on Tuesday and Thursday, respectively. Joining them will be fellow Dow Jones industrial average component Cisco Systems Inc. (CSCO) on Wednesday and 10 other members of the S&P 500 index throughout the week.

The week’s first economic report will be July import and export prices, released on Tuesday. July retail sales, the August Empire State manufacturing survey, the first estimate of second-quarter productivity, July industrial production and capacity utilization, June business inventories and the August housing market index will be released Wednesday. Thursday will feature July housing starts and the August Philadelphia Federal Reserve’s business outlook survey. The University of Michigan’s preliminary August consumer sentiment survey will be released on Friday.


Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

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