Using Screeners to Find Undervalued Stocks: A Step-by-Step Guide

Key Takeaways

• Stock screeners let you quickly narrow thousands of companies to a manageable list using financial filters like P/E and ROE.
• Look for a combination of low valuation metrics and strong fundamentals, such as low P/E, high return on equity, and manageable debt.
• Use multiple filters and timeframes to avoid false positives; always confirm results with company-level research.
• Stockalpha's screener can speed the process with prebuilt templates and exportable watchlists, but the logic applies to any screener tool.
• Common mistakes include over-relying on a single metric, ignoring industry context, and skipping qualitative checks like competitive advantage.

Introduction

Using stock screeners to find undervalued stocks means using software filters to search for companies that look cheap by several fundamental measures. It matters because thousands of public companies trade each day and you want a repeatable way to find names that might offer value.

In this guide you will learn which fundamental criteria to use, how to combine filters, and how to interpret the output. You'll also see step-by-step instructions for setting up a search with Stockalpha's screener and get real-world examples using tickers like $AAPL and $WMT to make the ideas concrete. Ready to build a shortlist of candidates using data instead of guesswork?

How Stock Screeners Work

A stock screener is a tool that filters the universe of stocks using rules you set. Filters can be price-based, valuation-based, growth-based, or balance-sheet-based. Screeners return a list that meets all the selected conditions so you can study those companies next.

Screeners are fast and repeatable. Once you save a filter set you can run it weekly or monthly and see new matches. That helps you stay systematic and prevents you from missing names because of information overload.

Types of Filters to Expect

• Valuation: price-to-earnings (P/E), price-to-book (P/B), enterprise value-to-EBITDA (EV/EBITDA).
• Profitability: return on equity (ROE), net profit margin, operating margin.
• Growth: revenue growth, earnings per share (EPS) growth over 3-5 years.
• Balance sheet: debt-to-equity, current ratio, interest coverage.
• Market and liquidity: market capitalization, average daily volume.

Choosing the Right Criteria for Undervalued Stocks

Undervalued doesn't mean cheap in every measure. You're looking for companies where price looks low relative to fundamentals, and those fundamentals are healthy and sustainable. Use a mix of valuation, profitability, and balance-sheet filters.

Here are practical, beginner-friendly criteria you can start with. You can change thresholds depending on market conditions or the industry you're screening.

Core Filters and Why They Matter

• P/E ratio, trailing 12 months (T12M): A low P/E suggests the market prices earnings cheaply. Try P/E < 15 as a starting point, but consider industry norms.
• Return on equity (ROE): Measures how well a company uses shareholders' capital. Look for ROE > 12% to find efficient operators.
• Debt-to-equity (D/E): High debt raises risk. Prefer D/E < 1.0 for many sectors, but expect higher levels in capital-intensive industries.
• Revenue or EPS growth: Positive recent growth, such as revenue growth > 5% over 3 years, helps confirm the company is not declining.
• Market cap: Define a size range that fits your strategy, for example mid- to large-cap (>$2B) for liquidity and stability.

Adjusting for Industry Differences

Different industries have different typical valuations and capital structures. A low P/E in tech might be rare, while utilities routinely show higher debt. Always compare a company's metrics to its industry median. That saves you from labeling a safe utility as 'overleveraged' when that is normal for the sector.

Step-by-Step: Building a Screener Using Stockalpha

Stockalpha's screener has a user-friendly interface with prebuilt templates for value and growth strategies. You can follow the logic below in any screener, but these steps map to Stockalpha's fields and options.

1. Set the universe: Start with U.S. listed stocks or a broader global universe depending on your preference. Limit by market cap if you want to avoid microcaps.
2. Apply valuation filters: Add P/E T12M < 15 and P/B < 2. These help find firms priced low relative to earnings and book value.
3. Add profitability: Set ROE > 12% and net margin > 5% to focus on companies that convert sales into profit efficiently.
4. Check balance sheet health: Add debt-to-equity < 1.0 and current ratio > 1.0 to avoid firms with risky leverage or liquidity problems.
5. Confirm growth: Require positive revenue growth over 3 years or EPS growth of at least 3% annually to ensure business momentum.
6. Save and run: Save the filter set as a template and run it. Export results to a watchlist for follow-up research.

Once you have a list, you want to prioritize. Sort by a combined score or by ROE, then look at the top 10 names. From there you should open each company page and read the latest earnings, management commentary, and analyst summaries.

Example Filter Set

• Market cap > $2B
• P/E T12M < 15
• ROE > 12%
• Debt-to-equity < 1.0
• Revenue growth (3-year) > 5%

Real-World Examples

Let's walk through two simplified, hypothetical examples to show how a screener result becomes a candidate for closer study. These are illustrative and don't constitute investment advice.

Example 1: Large-cap tech-like name

Say your screener returns $AAPL with P/E 14.5, ROE 35%, revenue growth 6% over three years, and low net debt. The low P/E, high ROE, and steady growth suggest the company remains profitable and is priced reasonably relative to earnings. You would then read recent earnings calls, examine competitive positioning, and confirm the growth drivers are sustainable.

Example 2: Consumer retail candidate

Imagine $WMT appears with P/E 13, ROE 18%, steady margins, and manageable debt. For a retailer, check same-store sales trends and inventory levels. If the fundamentals check out, you might add it to a watchlist and observe how the price reacts to upcoming earnings or macro events.

Interpreting Screener Results and Next Steps

A screener gives you names that meet numeric rules, not a recommendation. Use the list as a starting point for deeper due diligence. Your next steps include reading financial statements, listening to earnings calls, and estimating whether the market is undervaluing the company's future cash flows.

It's also useful to create tiers: immediate follow-up, monitor, and discard. That helps you allocate your time efficiently. Remember, a single cheap metric can be misleading, so combine quantitative and qualitative checks.

Common Mistakes to Avoid

• Relying on one metric: A low P/E alone doesn't mean a bargain. Combine valuation with profitability and balance-sheet filters to reduce false positives.
• Ignoring industry context: Comparing metrics across industries can mislead you. Always benchmark against peers or industry median numbers.
• Using too-tight filters: If filters are too strict you might miss good opportunities. Start broader and refine as you learn.
• Skipping qualitative checks: Metrics won't tell you about management quality, competitive moat, or regulatory risk. Read reports and listen to earnings calls.
• Confusing cheap for safe: A stock can be cheap for a reason. Investigate why the market is negative before assuming value.

FAQ

Q: How often should I run my screener?

A: Run it at least monthly to catch newly undervalued names and after major market events. Save templates so you can rerun results quickly.

Q: Is a low P/E always a sign of value?

A: No. A low P/E can reflect poor growth prospects, accounting issues, or structural decline. Always pair P/E with growth and quality metrics like ROE and debt levels.

Q: Can I use screeners for small-cap value opportunities?

A: Yes, but small caps often carry higher volatility and less liquidity. Add volume and market-cap filters and be prepared for higher risk and wider bid-ask spreads.

Q: Should I trust prebuilt templates on a screener?

A: Prebuilt templates are a good starting point, especially for beginners. But customize the settings to match your risk tolerance, time horizon, and the industries you prefer.

Bottom Line

Stock screeners are a powerful, time-saving way to find undervalued stocks when you use thoughtful, multi-dimensional filters. By combining valuation metrics like P/E with measures of profitability and balance-sheet strength, you reduce the chance of chasing false bargains.

Start with a clear filter set, save it, and run it regularly. Use the results as a research list, not as a final decision. At the end of the day, screeners help you focus your attention so you can do the qualitative work that numbers alone can't capture.

Next steps: pick a screener, build the example filter set presented here, and run it on a market you follow. Save your top candidates to a watchlist and review one company fully each week to build your research skills.