A brief presentation of the Piotroski F-Score

In this article, I will briefly present the Piotroski F-Score and show the output from screening the Russell 3000.  Joseph Piotroski received a B.S. in accounting from my alma mater, the University of Illinois in 1989.  He worked as a senior tax associate at the firm Coopers & Lybrand before receiving an MBA from Indiana University in 1994, and a Ph.D. in accounting from the University of Michigan in 1999.  He taught at the University of Chicago and is currently at Stanford.  Piotroski is known for a paper he wrote in 2000 entitled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.”

In the paper, Piotroski presented a model which outperformed the market.  He calculated a score with a maximum of 9 points based on 9 questions he asked from each company.  The highest returns came from companies that were among the cheapest 20% of stocks based on Price to book and that had a score of 8 or 9.  This model returned 23% over the backtest period.  The nine questions are:

• Is net income positive? (1 point if positive).
• Is operating cash flow positive? (1 point if positive).
• Net income growth > Total asset growth (1 point if true)
• Operating cash flow > Net income (1pt if true).
• Total asset growth > Total liabilities growth (1pt if true)
• Current ratio is higher this year vs last year. (1pt if true).
• Shares outstanding decrease (1pt if true).
• Gross margin is higher this year vs last year. (1pt if true).
• Sales growth > Asset growth (1pt if true).

To see the entire paper please go to the FatAlpha website, click on Articles and scroll down to “Priceless Academic Papers”.  On February 5^th, I ran a screen of the cheapest 20% in the Russell 3000 based on price to book and which had a Piotroski F-Score of 8 or 9.  The result from this run are the following stocks:  ACCO, BCOR, CHK, CPE, LRN, NFX, OC, OMG, PEIX, TEX, TRK.

ACCO is actually a holding in my portfolio.

Please note once again that the results from this or any other screens are not recommendations and I have not checked the integrity of the data or the inputs.  This page is meant to provide some food for thought.