Piotroski Score Screen Performance

June 15, 2010 | Comments (4)

Stock Screen Strategy and Backtest Series

Piotroski Performance – Piotroski Score Screen Performance

piotroski performance

Piotroski Performance | Photo: mr excel

Following on with the Piotroski score and Altman score theme lately, let’s take a look at how the Piotroski score can help strengthen your portfolio.

Joseph Piotroski is an academic professor who published a paper in 2002 titled, Value Investing: The use of historical financial statement information to separate winners from losers.

The paper itself is a great read, but can be simplified down to the following criteria a company should exhibit in order to receive high marks based on his studies.

Piotroski Criteria

Profitability

  • 1. Positive return on assets in the current year (1 point)
  • 2. Positive operating cash flow in the current year (1 point)
  • 3. Higher return on assets (ROA) in the current period compared to the ROA in the previous year (1 point)
  • 4. Cash flow from operations are greater than ROA (1 point)

Leverage, Liquidity and Source of Funds

  • 5. Lower ratio of long term debt to in the current period compared value in the previous year (1 point)
  • 6. Higher current ratio this year compared to the previous year (1 point)
  • 7. No new shares were issued in the last year (1 point)

Operating Efficiency

  • 8. A higher gross margin compared to the previous year (1 point)
  • 9. A higher asset turnover ratio compared to the previous year (1 point)

The neat thing about going through the Piotroski score is that, it doesn’t require any higher degree of mathematics. This makes it that much more effective and easier to customize and analyze.

For example, I could easily modify the requirements to compare each criteria to the previous 2 or 3 years, instead of just accepting an increase from the previous year.

Piotroski’s paper demonstrates that simple accounting knowledge and fundamental analysis can prevent many mistakes but also outperform. In other words, the point of the Piotroski strategy is to identify the healthiest companies at cheap prices.

Piotroski Screen Performance

The screen first looks at companies with low price to book ratios from the latest quarter and returns the top 20 stocks with the highest Piotroski score. Emphasis is placed on smaller cap companies and the screen assumes that a position is rebalanced every 6 months.

Breaking the screen performance into multiple time periods, the results are as follows.

The yearly performance numbers do not start from January and end at December. I started the back testing series around March, so I’ve kept the start and end points as March to try and be consistent. Not perfect, but the point is to see how Piotroski performs.

Piotroski Stock Ideas based on TTM

To calculate the Piotroski automatically, you can download and use the free Piotroski stock spreadsheet to calculate the numbers quickly as well as be able to compare previous years. The premium stock value calculator will also save you a ton of time by automatically performing 3 different types of valuations and immediately displaying fundamental data and analysis. Will cut your workload exponentially.

You can also get more Piotroski stock ideas from the Piotroski stock screener.

Disclosure

No positions in any stocks at the time of writing.

  • Dom Zito

    I thought Piotroski talked about buying the top ones and shorting the bottom ones and that is how his method eeked out a positive return in 2008.

  • LarsBech

    Being new to your site this is my first comment. I am from Denmark and has been interested in stocks for more than 20 years, but has never found an investment strategy that suits me well enough.

    That is a hefty loss in 2008 – not very nice to be an investor and seeing this kind of loss. Not many investors have the nerves to keep investing suffering such losses. Somehow this strategy should be combined with a technical approach to the market in order to avoid giving too much back. I know it is supposed to take as little time as possible, but it won’t work for me giving so much back.

    Besides – I know the positions are meant to be rebalanced for 6 months. Investing in smaller caps what about spread between bid and ask ? Can it actually be done ? If for some reason you need to get cash what’s the risk of the stock being hard to trade ?

    Are the results only for stocks bought and no stocks shorted ? Piotroskis idea was to short some stock as well, but for me that won’t work, so I am only interested in results for stocks bought.

    I have heard a rumour saying to combine Piotroski with Kirkpatrick value when FED is lowering interest rates. Anyone looked into this ?

    Best regards,
    Lars Bech

  • http://www.oldschoolvalue.com Jae Jun

    I do know a couple of people who maintain short positions by first filtering the worst companies from the Piotroski score.

    @ LarsBech,
    In 2008, everything took a hefty loss. No diversification, no asset class, no investment in the market withstood the big drops.

    It is just a matter of which performs better than a single 3 month or 1 year period.

    I don’t short as well, but Dom Zita above is correct that the Piotroski strategy is to short as well.

  • PakistanInvestor

    Hey,
    If anyone has access to good Piotrowski screener for the American markets, could you check the P/B average (approximately) for the lowest 20 P/B percentile of the 8.5/9 pointers?

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