Stock screens amid COVID-19

Here are some tips when using screeners in this market, plus some ideas.

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A chart of US stocks—as measured by the S&P 500—shows they have recouped much of their COVID-19 losses, as of June 25, 2020. But a closer look into what's actually driving the stock recovery reveals that the S&P 500's 5 largest companies, which make up more than 20% of the market-cap weighting of the index, according to data from FactSet, have accounted for much of those gains over the past few months. This suggests the breadth of the rebound may not be broad based.

More importantly, a recent surge in new coronavirus cases in several US states, as well as in countries like Brazil and India, underlies fears that the worst of the pandemic may not be over yet.

This is a market unlike any in history. Consequently, active investors may need to rethink how typical tools and strategies are utilized. If you are seeking new stock ideas, one tool that is commonly used is a stock screener. Here are 3 stock screens using Fidelity's Stock Screener that illustrate how you may want to approach screening for stocks, plus top results for each.

Looking for income

One of the most common screening characteristics on Fidelity.com is dividend yield. The top 10 results of a screen of common stocks with a market cap of at least $3.92 billion and a dividend yield of 5.96% or higher (sorted by dividend yield), as of June 25, 2020, were:

  • Ares Capital (ARCC)
  • Oneok (OKE)
  • Owl Rock Capital (ORCC)
  • CenturyLink (CTL)
  • Hess Midstream (HESM)
  • Gap (GPS)
  • Altria (MO)
  • Williams (WMB)
  • TFS Financial (TFSL)
  • Wells Fargo (WFC)

Let's dig into these screen results. While there are a few retailers and energy exploration companies that have been significantly impacted by coronavirus, as nearly all business have been to varying degrees, there are no companies in industries that have been hit the hardest—like restaurants, airlines, and hotels.

This is noteworthy for this screen because of how dividend yield is directly affected by stock price. It is calculated as the annual dividend per share divided by the stock price. If a stock price were depressed by coronavirus, that might artificially inflate the dividend yield (because the denominator decreased). While you would always want to explore if and why a stock price is depressed relative to its historical price range, this can be particularly important amid the umbrella of uncertainty introduced by COVID-19.

Even though this screen appears not to generate any stocks that are among the most impacted by coronavirus, you may want to add additional filters to strengthen your search results/align with your objectives. For example, if you want to add the insights of professional analysts, you might consider adding the Equity Summary Score (ESS) from StarMine from Refinitiv. Doing so produces the following list, sorted by highest ESS:

  • CenturyLink (CTL)
  • BCE (BCE)
  • Janus Henderson Group (JHG)
  • People's United Financial (PBCT)
  • Altria (MO)
  • Philip Morris (PM)
  • PPL (PPL)
  • AT&T (T)
  • Comerica (CMA)
  • Dow (DOW)

Searching for value

Screening for stocks using value as a primary objective can be more complicated than usual. For instance, value filters might produce a screen of stocks whose price has been beaten down due to the economic exposure of COVID-19, potentially resulting in its value appearing better than during more "normal" times (assuming the underlying earnings impact is not also factored in).

On the other hand, some stock prices may be inflated as investors anticipate benefits from changing COVID-19 dynamics. An example of this type of stock might be a pharma company that is working on vaccines and treatments. This could result in a higher-than-normal stock price that would make it appear like it has lower relative value.

One of the most popular value filters on Fidelity.com is price-to-earnings (P/E). The top 10 results of a screen of common stocks with a market cap of at least $3.92 billion and a P/E ratio of 8.78 or lower, as of June 25, 2020:

  • NRG Energy (NRG)
  • Equitable Holdings (EQH)
  • Vornado Realty Trust (VNO)
  • MGM Resorts (MGM)
  • Aercap Holdings (AER)
  • Metlife (MET)
  • Jefferies Financial (JEF)
  • Synchrony Financial (SYF)
  • Delta Air Lines (DAL)
  • Ameriprise Financial (AMP)

Unlike the first income screen above, this screen produces hotels and airlines, among other companies, that have been deeply impacted by the pandemic. Again, you may want to add additional filters, such as ESS. Here is that list, sorted by highest ESS:

  • Biogen (BIIB)
  • Metlife (MET)
  • CenturyLink (CTL)
  • Seagate Technology (STX)
  • Bank of New York Mellon (BK)
  • Aercap (AER)
  • HP (HPQ)
  • People's United Financial (PBCT)
  • Hartford Financial (HIG)
  • First American (FAF)

This list is dominated by financial services and technology companies, which are not immune to the adverse impacts of a worsening in the pandemic, among other risk factors. Again, it's important to do additional research to evaluate screen results. You might consider looking at a multiyear price chart to see if these companies were exhibiting trends before the crisis that might help explain why their value appears as it does (e.g., is there a long-term price drop that is causing the stock's P/E to appear relatively attractive).

Tailoring preset independent expert screens

P/E is primarily used to compare a stock with another comparable stock and/or versus its own history. While that can provide useful information, many professional investors attempt to determine the intrinsic value of a stock. On Fidelity.com, there is an expert screen from third party research firm ISS-EVA that looks for attractively valued stocks in relation to their intrinsic value within their sector. This screen is based on the widely known "value at a reasonable price" methodology. It looks at a firm's ability to earn and increase economic profit, which measures profit after deducting the cost of all capital. The screen adjusts for risk and excludes stocks trading under $5 a share, as well as those with minimal trading volume.

As of June 25, 2020, the top 10 results of this screen, sorted by the highest ISS-EVA score of common stocks with a market cap of at least $3.92 billion, were:

  • Agco (AGCO)
  • Amdocs (DOX)
  • Flowers Foods (FLO)
  • Icon (ICLR)
  • MDU Resources (MDU)
  • Magna International (MGA)
  • Northern Trust (NTRS)
  • Oshkosh (OSK)
  • Booking Holdings (BKNG)
  • Reliance Steel & Aluminum (RS)

Of course, even if you have determined the intrinsic value of a stock, that may not account for how the investment might perform while the coronavirus pandemic persists. Several stocks from this screen have significant exposure to the pandemic's impact on the economy, including a restaurant/travel reservation site. Even though this is an expert screen, you still might want to include additional screening filters. Adding in ESS may provide a qualitative aspect that the intrinsic value criteria isn't capturing. Here is that list, sorted by highest ESS:

  • Qualys (QLYS)
  • Amdocs (DOX)
  • Schneider National (SNDR)
  • J.M. Smucker (SJM)
  • Tech Data (TECD)
  • Northern Trust (NTRS)
  • Flowers Foods (FLO)
  • Icon (ICLR)
  • Allison Transmission (ALSN)
  • MDU Resources (MDU)

Dig deeper

With any stock screen strategy, more research is needed to determine if any of these investments are right for you. You should fully understand the risks involved, and each investing opportunity should be considered within the context of a well-diversified investment strategy that conforms to your specific time horizon, objectives, and risk parameters. You should always be aware of the heightened risk of having a poorly diversified portfolio, particularly in these volatile and uncertain times. Given the rising risk of a resurgence in coronavirus infections around the world as global economies attempt to open back up, you may need to adjust how you normally use screeners and other strategies.

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