CUSTOM COMPOSITES SCREENING
Composite screening is superior to more common “exclusive” screening tools. The reasoning is simple; a typical exclusive screen looks for candidates with absolute cut-offs. For example, an investor may specify a screen looking for companies with ROE above 15% and P/Es below 15 times current earnings. While this screen may yield a number of suitable candidates, it will also exclude a number of ideas that might be of great interest. Consider a company with an ROE of 20% and a P/E of 15.5X earnings; given the intent of the search, a candidate with these characteristics would likely be valuable to consider. Composites solve this candidate leakage. The composite score based on a 20% ROE and a 15.5X P/E would potentially rank this company as superior to a company with an ROE of 15% and a P/E of 15X.
Composites also lend themselves well to single sector or industry searches. Individual sectors tend to have their own specific valuation profiles. Composites create ranks rather than absolute levels based on the group's metrics. This means that adjustments for valuation level for each sector or industry are unnecessary. Using Composites means investors can quickly find the best candidates using a very specific search routine.
In composite screening filters are only used to "condition" the universe of candidates. Pre-selecting the candidates leads to superior peer comparisons. The example below focuses exclusively on health care: