How to Pick Stocks:
A Step-by-Step Screening Process

Step 1: Define Your Investment Universe

Start by deciding which markets you will invest in. This isn't about picking countries — it's about defining where your informational edge lies. If you live in Saudi Arabia and follow TASI news closely, you may have a genuine edge over the average global investor analyzing TASI mid-caps.

MSCI's market classification divides global markets into Developed, Emerging, and Frontier — each with distinct risk and return profiles. Saudi Arabia was upgraded from Frontier to Emerging Market status in 2019, attracting significant passive fund inflows from benchmarks like the MSCI Emerging Markets Index.

Also consider sector focus: are you a generalist or do you want to develop deep expertise in one sector (e.g., petrochemicals, banking, real estate)? Sector specialists often outperform because they can catch nuances that generalists miss.

Step 2: Apply Quantitative Filters

Screening eliminates the vast majority of candidates based on measurable financial criteria. Here is a sample screening framework adaptable to any investment style:

The TruePrice.Cash stock screener lets you apply these filters across TASI, S&P 500, JPX, and LSE simultaneously. For TASI specifically, cross-reference with the Tadawul market summary for sector performance context.

Step 3: Qualitative Review

After quantitative screening, you'll typically have 20–50 candidates. Now the real work begins: reading the annual reports, listening to earnings calls, and assessing management quality.

Step 4: Valuation Check

By now your list should be down to 5–10 companies. Run a proper valuation on each:

Use at least two methods — typically DCF (covered in Tutorial 6) and a relative valuation using EV/EBITDA or P/E multiples vs comparable companies. If both methods suggest undervaluation, conviction is higher. If they diverge significantly, investigate why.

Calculate a fair value range rather than a point estimate. If your DCF gives SAR 80–110 and the stock trades at SAR 72, you have a potential margin of safety across the entire range. If it trades at SAR 95 (middle of your range), the upside is limited.

Step 5: Portfolio Fit Assessment

A great stock in isolation may be a poor addition to your portfolio. Before buying, ask:

Correlation: Does this stock move with the rest of your portfolio? Adding a second petrochemical company when you already own Sabic creates concentrated exposure to oil prices. Portfolio Visualizer is a free tool to check correlations across your holdings.

Position sizing: The Kelly Criterion provides a mathematical framework for position sizing based on edge and odds — most professional investors use a fractional Kelly (25–50%) to reduce variance.

Conviction level: Reserve your largest positions for your highest-conviction ideas — those where you've done the deepest work and understand the business better than the market does.

Proven Screening Strategies to Adapt

Academic validation of quantitative screening strategies is extensive. The AQR Capital Management research library and Research Affiliates publish peer-reviewed studies on factor-based investing — the academic backbone of systematic screening.