Approximately one year ago, Geoff Gannon published an article at GuruFocus of a Chicago accounting professor who wrote a paper regarding a technique which has become known as the F-Score. The paper, entitled, “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers” indicated a 23% back-tested return and people took notice. Geoff wrote:

The F-Score helps with companies that are cheap but don’t look like they’re headed in the right direction. If you can find low price-to-book stocks with high F-Scores you can buy some great bargains as management is turning their business around.

The better known the stock is the less helpful the F-Score becomes. The F-Score works best on small stocks that aren’t covered by analysts and aren’t owned by mutual funds.

The F-Score is based upon nine questions. Once answered, you total those that meet the criteria. Anything with 1, 2 or 3 — don’t touch it. Stocks with a 4, 5 or 6 are quite common and probably deserve further research. If a stock has a 7, 8 or 9, you have very possibly stumbled on some winners, especially those with 8 and 9s.

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

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

· Higher return on assets (ROA) in the current period compared to the ROA in the previous year (1 point).

· Cash flow from operations are greater than ROA (1 point)

Leverage, Liquidity and Source of Funds

· Lower ratio of long term debt to in the current period compared value in the previous year (1 point).

· Higher current ratio this year compared to the previous year (1 point).

· No new shares were issued in the last year (1 point).

Operating Efficiency

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

· A higher asset turnover ratio compared to the previous year (1 point).

Below are some stocks that pass Piotroski’s test and would be a great place to start:

Legg Mason (LM)

F-Score = 8

Held by five gurus: Mario Gabelli, Robert Olstein, Brian Rogers, John Keeley, Dodge & Cox

The E.W. Scripps Co. (SSP)

F-Score = 7

Held by two gurus: Mario Gabelli, Joel Greenblatt

Benchmark Electronics (BHE)

F-Score = 8

Held by one guru: Ken Fisher

AU Optronics Corp. (AUO) (ADR)

F-Score = 8

Held by one guru: Ken Fisher

Renesola Ltd. (SOL) (ADR)

F-Score = 8

All gurus sold out

Disclosure: I have no position in any of the stocks

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