Who is Joseph Piotroski?
He teaches accounting at the University of Chicago. He has developed a simple strategy that anyone can use to become a better investor.
His Proposition
Based on his accounting knowledge on fundamental analysis, he is able to provide an organised way to hunt for value stocks.
His Research
Between 1976 and 1996, He focused on the bottom 20% of the price/book universe at the end of each year.
He discovered the following:-
* one-year performance of these stocks beat the market by about six percentage points annually,
* but all the gains came from fewer than half of the companies.
Upon analysing the winners and losers, he is able to rank stocks on a 9-point scale based on accounting benchmarks.
His 9-point Scale
The Scale is sub-divided in 3 main areas ie. 4 points on Income Statement items, 3 points on Balance Sheet items and 2 points on efficiency factors respectively.
1. positive earnings,
2. positive cash flow,
3. year-to-year earnings growth
4. cash flow that exceeded earnings (a crude measure of accruals)
5. if the ratio of long-term debt to total assets declined over the past year,
6. if the current ratio improved (current assets divided by current liabilities)
7. if the company didn't issue shares
8. an improvement in gross margins
9. an improvement in asset turnover (revenue divided by total assets)
His Results after applying the 9-point Scale
* Companies near the top of Piotroski's rankings (eights and nines) beat the market by 13% over one year.
* Companies near the bottom (zeros and ones) trailed the market by 10% points.
* The gains continued for two, possibly three, years.
Summary
He has identified a set of criteria that can beat the market by up to 13% or avoid significant loss. The question now would be - Is the same scale applicable to our regional stock markets?
Reference - "Value or Growth", Paul Sturm, Smartmoney, May 2004
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