Monday, 9 June 2014

Equity: A Look At Piotroski Score

About Joseph Piotroski via Wikipedia:

Joseph D. Piotroski is an American professor who specializes in accounting and financial reporting issues. As of October 2010 he serves as associate professor of accounting at the Stanford University Graduate School of Business. Prior to that, he taught at the University of Chicago Booth School of Business from July 1999 to June 2007.
Via GrahamInvestor:
...... Joseph Piotroski reasoned that because value stocks are by definition often troubled companies, many will not possess the financial resources to recover. Consequently, Piotroski wondered if it was possible to improve the performance of a value stock portfolio by eliminating stocks that were the weakest financially.

Quote ValuePickr:

The Piotroski paper attempts to establish that an universe of stocks with low price-to-book ratios when rated using a nine-point scale to score their financial strength, significantly outperform the market.

Piotroski demonstrated that the strategy worked well: Buying those companies that passed the Piotroski rigorous test and shorting those that didn't produced a 23% average annual return from 1976 through 1996. That's more than double the S&P 500's gain during that time period.

Further proof that the strategy appears robust across time, came when it was found to be one of the very few stock screening strategies to show positive results in 2008.

Piotroski has defined 9 criteria to grade the financial soundness of a company.

Via GrahamInvestor:
  1. Net Income: Bottom line. Score 1 if last year net income is positive.
  2. Operating Cash Flow: A better earnings gauge. Score 1 if last year cash flow is positive.
  3. Return On Assets: Measures Profitability. Score 1 if last year ROA exceeds prior-year ROA.
  4. Quality of Earnings: Warns of Accounting Tricks. Score 1 if last year operating cash flow exceeds net income.
  5. Long-Term Debt vs. Assets: Is Debt decreasing? Score 1 if the ratio of long-term debt to assets is down from the year-ago value. (If LTD is zero but assets are increasing, score 1 anyway.)
  6. Current Ratio:  Measures increasing working capital. Score 1 if CR has increased from the prior year.
  7. Shares Outstanding: A Measure of potential dilution. Score 1 if the number of shares outstanding is no greater than the year-ago figure.
  8. Gross Margin: A measure of improving competitive position. Score 1 if full-year GM exceeds the prior-year GM.
  9. Asset Turnover: Measures productivity. Score 1 if the percentage increase in sales exceeds the percentage increase in total assets.

Further Reading:
2. Valuepickr
3. Fool.Com
4. EquitiesLab
5. Secondthoughts...

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