A short time ago we saw this blog a method to measure the chances of a company going bankrupt through the Altman Z-Score. We also saw the method of detecting accounting manipulation with the Beneish M-Score. On this occasion, I will present you a method to beat the market combining criteria of quality, financial strength and price through the Piotroski F-Score.
What is the Piotroski F-Score?
The Piotroski F-Score is a formula that allows us to find companies to invest in that combine both business and financial strength and a good price.
This formula was created by the Stanford University Graduate School of Business Professor of Accounting Joseph D. Piotroski in an article called Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, which he wrote in 2.000 while working at the University of Chicago.
Piotroski F-Score formula
Piotroski's formula is based on 9 criteria. The company scores 1 point if it exceeds each criterion. The maximum score is 9 points.
The criteria are as follows:
- Positive ROA in the current year.
- Positive cash flow in the current year.
- Higher ROA in the current year than in the previous year.
- The operating cash flow is higher than the net profit excluding extraordinary items.
- Increase in gross margin.
- Increase in asset turnover.
- Reduction in leverage (Debt / Assets).
- Increase in the current ratio (Current assets / Current liabilities).
- The company did not issue any new shares in the last year.
To use the formula, Piotroski first looks for stocks with a lower Price / Book ratio. Among these, select the actions that meet at least 8 of the nine requirements that we have seen.
Results of the application of the Piotroski F-Score
The result of an investment portfolio that invests in companies with a high F-Score (8-9) and goes short in companies with a low F-Score (0-2) would be 23% per annum compounded between 1.976 and 1.996 according to the study carried out by Joseph Piotroski.
Where to find stocks that meet the Piotroski criteria?
The Old School Value blog has a section calledPiotroski Score Stock Screen, a screener in which listed companies that meet Piotroski's criteria appear in its F-Score.
There is also a ranking of the Piotroski F-Scores on The Graham Investor blog.
How and how much to use the F-Score?
My recommendation is to use one of the screeners that I showed you, be it Old School Value or The Graham Investor, to find investment ideas that you should analyze later.
What I do not recommend is using this method without complementing it with an own assessment of the companies in which we are going to invest, especially looking for competitive advantages through a qualitative analysis. In this way you can avoid falling into possible value traps that may have passed between the filters of the F-Score.