First, find yourself a good stock screening site. I like T. Rowe Price and Charles Schwab for this, but there are many from which to choose.
Next, put in your screening criteria and use them to reduce the thousands of available assets to only a few score.
Here, for example, is one initial set of generic value parameters:
- Return on equity (ROE) 15% or more;
- Debt to equity 1 or less;
- Price to earnings ratio less than 10;
- Price to book value 2 or less;
- Price to sales (revenue) 1 or less;
- Price to cash flow ratio 5 or less.
Applying those guidelines reduces a selection pool of about 6000 stocks to only 69 (per the Schwab screening tool effective at the close of business 8/17/04).
I screen the results further by culling from those selected stocks the ones with the lowest debt to equity and price to sales ratios. Today these turn out to be stocks with D/E .33 or below plus P/S .5 or below.
35 stocks remain after applying those two filters.
I distrust the accuracy of any single stock selection tool and so examine these 35 stocks still more by looking them up on AAII's site and both double-checking and further refining the criteria.
Here, for instance, I also look for which stocks do or do not pay dividends, check the payout ratios (must be .5 or less), see if their current ratios are 2 or above (a plus, but not essential), note the market capitalization (generally, lower is better), and consider the latest stock prices (preferring not to purchase very low or very high priced stocks, with a few exceptions).