Piotroski Score

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Piotroski Score

Postby SHARK » Fri Apr 13, 2018 1:59 am

The Piotroski score is a discrete score between 0-9 that reflects nine criteria used to determine the strength of a firm's financial position. The Piotroski score is used to determine the best value stocks, with nine being the best and zero being the worst. The Piotroski score was named after Chicago Accounting Professor Joseph Piotroski, who devised the scale, according to specific aspects of company financial statements. Aspects are focused on the company’s accounting results in recent time periods (years). For every criteria met (noted below), one point is awarded; otherwise, no points are awarded. The points are then added up to determine the best value stocks.

BREAKING DOWN 'Piotroski Score'
The Piotroski score is broken down into profitability; leverage, liquidity, and source of funds; and operating efficiency categories, as follows:

Profitability Criteria:

Positive Net Income (1 point)

Positive return on assets in the current year (1 point)

Positive operating cash flow in the current year (1 point)

Cash flow from operations being greater than net Income (quality of earnings) (1 point)

Leverage, Liquidity and Source of Funds Criteria:

Lower ratio of long term debt in the current period, compared to the previous year (decreased leverage) (1 point)

Higher current ratio this year compared to the previous year (more liquidity) (1 point)

No new shares were issued in the last year (lack of dilution) (1 point).

Operating Efficiency Criteria:

A higher gross margin compared to the previous year (1 point)

A higher asset turnover ratio compared to the previous year (1 point)
If a company has a score of 8 or 9, it is considered a good value. If the score adds up to between 0-2 points, the stock is considered weak. Piotroski's April 2000 paper "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers," demonstrated that the Piotroski score method would have seen a 23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted. As a starting point, Piotroski suggested investors begin with a sample of the bottom 20% of the market in terms of price-to-book value.

Of course, with any investment system, looking at past results doesn't mean it will work the same way in the future.

Scoring with the Piotrosky Method
As an example of the Piotrosky scoring method in action, note the following criteria calculations for Foot Locker (FL) in 2016:

Profitability:

2016 Net Income ($664,000,000) (Score:1 point)

2016 ROA (17%) (Score: 1 point)

2016 Net Operating Cash Flow ($816,000,000) (Score: 1 point)

2016 Cash Flow From Operations ($816,000,000) > Net Income ($664,000,000) (Score: 1 point)

Leverage:

2016 long-term debt ($127,000,000) versus 2015 long-term debt ($129,000,000) (Score: 1 point)

2016 current ratio (4.30) versus 2015 current ratio (3.72) (Score: 1 point)

No new shares issued in 2016 (Score: 1 point)

Efficiency:

2016 Gross Margin (33.94%) versus 2015 Gross Margin (33.08%) (Score: 1 point)

2016 Asset Turnover Ratio (2.04) versus 2015 (2.02) (Score: 1 point)

Foot Locker's total Piotrosky score in 2016 was a full 9, making it an excellent value proposition as of 1/28/17, according to the Piotrosky method.
Price is what you pay. Value is what you get.”

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Re: Piotroski Score

Postby SHARK » Fri Apr 13, 2018 2:19 pm

Price is what you pay. Value is what you get.”

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Re: Piotroski Score

Postby SHARK » Fri Apr 13, 2018 8:49 pm

Piotroski’s F-Score: The science of value investing

The cornerstone of investment philosophy of Benjamin Graham, the guru of value investing, was to invest with “margin of safety”, which means investing in stocks at a deep discount to their intrinsic value and thereby minimizing the downside risk and maximising the upside potential.

In layman terms, he was always interested in buying “One dollar at fifty cents”. Can one buy one dollar at fifty cents? The answer is, YES! A few super-investors of Graham and Dodds Ville, most of them were disciples of Benjamin Graham, have been doing it for years now. The most well-known among all is Warren Buffet. Having said that, they are few and far between.

Value investing for a long time remained in the realm of art rather than science. Separating true value stocks from the falling knives has remained a huge challenge over the years. Several approaches, both quantitative as well as qualitative, used to discern potential winners from seemingly cheap looking stocks have had limited success.

And separating man from the boys had remained a challenge for most professional investors over the years till the time Piotroski introduced his famous F-score in his year-2000 paper titled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers”. He demonstrated that the Piotroski’s F-score method would have seen a 23 percent annual return between 1976 and 1996, if the expected winners were bought and expected losers shorted.

Let’s have a look at how we can use Piotroski’s F-score to separate true value stocks from long list of cheap stocks in three simple steps.

Step 1: Identify cheap stocks from the universe:

We choose our investment universe (say BSE 500 stocks) and sort stocks in the ascending order of their Price-to-book value multiple (you can try alternative measures like P/E, EV/EBITDA or EV/EBIT as well) and then them into five quintiles (20%), cheapest to expensive stocks.

Step 2: Calculating F-score for the shortlisted cheap stocks

F-score is calculated by using nine criteria divided into three groups: Profitability signals, Leverage, Liquidity and Source of funds and Operating efficiencies. Stock gets 1 or 0 point for each criterion. Total of all points gives Piotroski F-Score between 0 to 9. Following table shows how F-score is calculated.

Profitability Signals

1. Return on Assets: 1 point if it is positive in the current year, 0 otherwise.
2. Operating Cash Flow: 1 point if it is positive in the current year, 0 otherwise.
3. Change in Return of Assets (ROA): 1 point if ROA is higher in the current year compared to the previous one, 0 otherwise.
4 Accruals (Quality of earnings): 1 point if Operating Cash Flow/Total Assets is higher than ROA in the current year, 0 otherwise.

Leverage, Liquidity and Source of Funds

5. Change in leverage (long-term): 1 point if the ratio is lower compared to previous year, 0 otherwise.
6. Change in Liquidity (current ratio): 1 point if the ratio is higher compared to previous year, 0 otherwise.
7. Equity issuance 1 point if there is no new issue of shares that leads to dilution in current year, 0 otherwise.

Operating Efficiency

8. Gross Margin 1 point if the gross margin is positive for current year, 0 otherwise.
9. Change in Asset Turnover 1 point if the ratio is higher compared to previous year, 0 otherwise.

Step 3: Using Piotroski’s F-score in separating value stocks from falling knives:

This step uses F-score calculated in step 2 to separate value stocks from the list of cheap stocks. The stocks with F-score of 7-9 naturally are potential winners and are showing clear sign of improvement in financial performance, whereas stocks with scores of 1-3 are clearly potential losers. The most difficult job is done. We have been able to separate real value stocks from the falling knives from the large list of cheap stocks - Mission accomplished!
Price is what you pay. Value is what you get.”

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Re: Piotroski Score

Postby push » Wed Apr 18, 2018 9:28 pm

Thanks Shark, great tool. It seems really hard to find one with a score of 8-9. did you find any?

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Re: Piotroski Score

Postby SHARK » Wed Apr 18, 2018 10:16 pm

The companies we need to avoid would be 1-2.99 :) But these can turn later with good turnarounds. So we need to use with some common-sense i believe.
Price is what you pay. Value is what you get.”


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