I Screen, You Scream: The Perils of Stock-Screening Tools
By Mark Ingebretsen

You'll find stock screens on just about every major financial Web site you visit, and most of them are free. If you're a seasoned investor, they're among the most useful tools available online.

But common as they are, stock screens come with very little training on how to use them. This makes them among the most dangerous tools available on the Web. Used incorrectly, a stock screen can loose you a fortune in bad trades.

Stock screens are online search engines that help you find the kinds of stocks you'd like to trade. There are also screens that help you select mutual funds. But we'll just be dealing with stock screens here. (A short list of some of my favorites appears at the end of this column.)

If you're unfamiliar with stock screens, head over to Stock Point. I'm using this site as an example because it syndicates its screening tool to many other financial Web sites, including Nasdaq's.

Stock Point's screen is an example of what I would call a first-generation stock-screening tool. Like a lot of early stock screens, it looks just like a questionnaire. You fill in the blanks based on whatever criteria you use to evaluate a stock. Do you want to consider only stocks with greater-than-30% annual earnings growth? What's the minimum volume you'll tolerate before you'll actively trade a stock: 100,000 shares, 500,000 shares? What price-to-earnings (P/E) level will allow you to sleep at night? Once you've entered all your answers, the stock screen combs through thousands of issues and coughs up a list.

So far, so good. In fact, this relatively simple exercise can be a great help to beginning investors. That's because by filling in the blanks, you're actually defining the rules you plan to follow when buying and selling stocks. In effect, you're saying: ''Yes, I only want to invest in or trade stocks of companies with solid five-year earnings growth rates, and those that have conservative P/Es and a market cap of $1 billion or more,'' or whatever criteria you come up with. Laying out rules of this kind is a first step toward creating an investment strategy.

Just don't run out and buy a boatload of the stocks spit out by a stock screen. Because it'll likely cost you. And here's why: Stock screens are great at giving you lagging data. So any positive information you uncover is most likely already priced into the stock. The better the indicators look, the greater the likelihood that the stock is due for a retracement.

Here's an example: Zacks.com, the earnings-estimate service, has an elegantly simple stock screen that allows you to focus on variables such as ''top price movers for one week'' or ''best change in broker recommendations for one week.'' Both are great indicators. And it could well be that the stocks identified by these indicators are truly on a tear, and that they'll continue rising. For novice investors, there's a great temptation to jump in.

But it's also possible that a group of astute traders out there sense that these stocks have made a short-term top and are due for a fallback. Those who own the stock might sell into this strength. Other seasoned traders might even sell them short. In all likelihood, these experienced traders will make decisions of this kind only after they've studied each stock's chart. The result of their selling would be a short-term reversal -- one that would burn any trader who bought in at the high.

Another common mistake newcomers to stock screens make is searching for too many variables. The more clutter you add, the less likely you're going to get definitive results. A successful swing trader I know basically emphasizes just two variables in her screens. First she looks for triple-digit or high-double-digit growth rates. Next, she looks for daily volume of at least 100,000 shares. This screen gives her a list of about 50 securities, culled from 8,000. She puts those 50 securities on a watch list. And she regularly reviews the charts on each, looking for indications of a short-term breakout.

And that's maybe the best way to use stock screens. They're tools that allow you to isolate a reasonable number of stocks that you can monitor and study further. With that in mind, check out the list of screens below.

Best screen for beginners: Quicken.com. The site's full-search screen explains what each term you encounter means and its relevance as you select your criteria. Quicken.com's screen also lets you easily create a portfolio of the stocks returned by each search.

Best subscription site: WallStreetCity.com. The site's editors build ready-made screens that subscribers can access. Recent examples: ''Penny stocks poised for a breakout'' and ''Oversold stocks that may have bottomed out.'' Each of these predefined screens is explained in an article, and the specific search parameters are listed so you can duplicate the screen yourself in the future. Experienced users can also create screens of their own, drawing upon more than 700 technical and fundamental indicators. Subscription packages, which include other tools such as streaming quotes, range from $9.95 to $49.95 per month.

For sector investors: JavaTicker. Use this Java tool to build a customized ticker that shows, for example, only semiconductor stocks or only financial stocks. The screening tool allows you to rank stocks within sectors by criteria such as highest insider buying or best earnings surprises.

Back testing: CNBC. A nice, easy-to-navigate interface lets you quickly isolate the stocks you're looking for. But what's really great about this screen is the back-testing feature. It shows you via a chart how well the variables you selected in the screen would have performed over the past year had you traded on them.

The future is now: Pristine.com. A popular site with active traders, Pristine.com has a real-time screen called Pristine ESP that continually scans market data for breakout stocks and the like, based on the trading strategies that have been programmed into the application. But what makes this screen really fun is that an animated ''bot,'' like the paper clip guy in Microsoft Office, tells you when a trading opportunity arises, along with instructions on how to play it. Pristine ESP is directly integrated into a high-end daytrading platform called the Executioner. When the Pristine ESP bot pops on screen, the executioner's order screen is already filled out with the default number of shares you trade. You then have the option of either hitting or canceling the order. The basic service is free. Monthly subscriptions: $30 to $250.

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