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Joseph Piotroski (Professor at the
University of Chicago)
came up with the idea of developing an investment formula that is quite
successful.
His paper “Value Investing: the use of historical financial information to separate
winners from losers” was published in 2000.
http://www.chicagobooth.edu/faculty/selectedpapers/sp84.pdf
In this paper he showed that by using a set of nine different fundamentals
we could outperform the market by 10% a year on average from 1976 to 1996.
It is clear that we were attracted to this formula and that we would
implement this kind of screeners on our website.
Piotroski came up with a nine point scoring mechanism for stocks. It was
designed to be applied to value investment in low P/B stocks (20% lowest P/B
stocks) . This limits the strategy to true value companies.
But it is useful for any set of stocks. (We have implemented the algorithm
also to the best 20% Magic Formula stocks and to the 20 % best NCAV companies)
Piotroski scanned the companies on the following basis; Financial performance,
Leverage-liquidity, source of funds and Operating efficiency.
Besides the price to book ratio, the analysis is based on accounting
fundamentals and consists of awarding one point for each of the following tests:
1.positive earnings
[F_ROA]
2.positive cash-flow
[F_CFO]
3.increasing ROA
[F_ΔROA]
4.increasing cash-flow from operations
[F_ACCRUAL]
5.decreasing long-term debt as a proportion of total assets [F_ΔLEVER]
6.increasing current ratio (indicating
an increasing ability to pay off short-term debt)[F_ΔLiquid]
7.decreasing or stable number of shares outstanding
[EQ_OFFER]
8.increasing asset turnover (indicating an increasing sales as a proportion
of total assets) [F_ΔTURN]
9.increasing gross margin
[Δ_MARGIN]
F_SCORE= F_ROA+ F_CFO+ F_ΔROA+ F_ACCRUAL+ F_ΔLEVER+ F_ΔLiquid+ EQ_OFFER+
F_ΔTURN+
Δ_MARGIN
Each company is given either a one or a zero value on each variable.
The sum of the variables is F_SCORE (between 9 and 0).
Finally the companies are ranked from best to worst.
Note:
The only difference between the
Piotroski formula and our model is in evaluating the number of shares
outstanding;
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If the number of shares outstanding is stable we compute 0,5
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the company buys back stock we compute 1
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There will be a full coverage of the back-test made on either Greenblatt
and Piotroski formulas.
Go to the Joseph Piotroski Stock Screener
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