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AlphaScreens: The importance of being earners

Looking behind profitability tests is crucial to pick winners.
July 2, 2018

In a timely reminder that screens are just a starting point for further research, at the time of writing, shares in gaming software manufacturer Playtech (PTEC) are falling through the floor. Taking last closing price data, from Friday June 29, PTEC passed all our FTSE All Share dividend screen tests but, thanks to a profit warning on Monday 2 July, this wouldn’t be the case if we ran the screen later, so this result should be discarded.

Other companies that passed all eight tests from our FTSE All Share screen include recruiter Page Group (PAGE), packaging manufacturer RPC Group (RPC) and engineering solutions provider Costain (COST). The bad news at Playtech highlights the importance of looking behind the numbers in our screens and assessing whether the key earnings growth metrics are on a sure footing. As if to reiterate this point, many of the companies which fail just one of our FTSE All Small dividend screen tests, fall short on one of the earnings criteria. 

  • Our screening of the FTSE All Small Companies Index didn’t result in any company passing all eight tests. Twelve companies passed seven out of eight, with the failed tests providing a useful insight into what to look out for next when assessing companies that score well on this screen. Of the twelve, five failed our earnings growth forecast test, three failed on past compound earnings growth, three failed the dividend cover test and one failed on dividend growth.
  • In the Aim screen, four companies pass 8/8 tests. These still include MTI Wireless Edge (MWE) and Property Franchise Group (TPFG). The two new Aim stocks which meet all our criteria are concrete levelling specialist Somero Enterpises (SOM) and voucher and gift card innovator Park Group (PKG). The All Small screen provides the clues that the next stop for investors evaluating these companies is to assess business models and the prospects for sustainable profits growth.
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