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Dave Brickell
Dave Brickell

The Piotroski F-Score: Reviewing Joseph Piotroski's Accounting-Based Value Investing Screen

April 13, 2011

The Piotroski F-Score aims to identify the healthiest companies amongst a basket of value stocks through applying a set of nine accounting-based stock selection criteria.

Background to the F-Score

Joseph Piotroski is now associate professor of accounting at the Stanford University Graduate School of Business. He developed the F-Score back in 2000 while at the University of Chicago. Piotroski recognized that, although it has long been shown that value stocks (or high book-to-market firms as he calls them) have strong returns as a group, there is nevertheless very wide variability in terms of the returns of these stocks. He noted that: Embedded in that mix of companies, you have some that are just stellar. Their performance turns around. People become optimistic about the stock, and it really takes off [but] half of the firms languish; they continue to perform poorly and eventually de-list or enter bankruptcy.”

What he wondered was whether it was possible to weed out the poor performers and identify the winners in advance. He therefore sought to develop a simple accounting-based stock selection strategy for evaluating a stock’s financial strength. Piotroski's F-Score involves nine variables from a company’s financial statements. One point is awarded for each test that a stock passes. Piotroski regards any stocks that scored eight or nine points as being the strongest.

Does the F-Score work?

Empirical analysis to test out the strategy in the UK market seems to be very limited. However, Piotroski’s research in the US does suggest that this type of fundamental analysis can be an effective value filter. By investing in the top performers, he showed that, over a 20-year test period from 1976 through 1996 that “the mean return earned by a high book-to-market investor can be increased by at least 7.5% annually”. Furthermore, he found that buying the top stocks in the market and shorting those that got the worst scores would have resulted in 23% annualized gains, more than double the S&P 500 broad market index return. Piotroski also found that weak stocks, scoring two points or less, were five times more likely to either go bankrupt or delist due to financial problems.

More recently, the American Association of Individual Investors revealed that the F Score was the only one of its 56 screening methodologies that had positive results in 2008 (up 32.6% on average across 5 stocks, versus -41.7% for all of the AAII strategies over the same period).

Calculation / Definition of F-Score

Piotroski's approach essentially looks for companies that are profit-making, have improving margins, don't employ any accounting tricks and have strengthening balance sheets. The nine variables are split into three groups:

A. Profitability Signals

1. Net Income – Score 1 if there is positive net income in the current year

2. Operating Cash Flow – Score 1 if there is positive cashflow from operations in the current year.

3. Return on Assets – Score 1 if the ROA is higher in the current period compared to the previous year.

4. Quality of Earnings – Score 1 if the cash flow from operations exceeds net income before extraordinary items

B. Leverage, Liquidity and Source of Funds

5. Decrease in leverage – Score 1 if there is a lower ratio of long term debt to in the current period compared value in the previous year .

6. Increase in liquidity – Score 1 if there is a higher current ratio this year compared to the previous year

7. Absence of Dilution – Score 1 if the Firm did not issue new shares/equity in the preceding year.

C. Operating Efficiency

8. Score 1 if there is a higher gross margin compared to the previous year

9. Asset Turnover – Score 1 if there is a higher asset turnover ratio year on year (as a measure of productivity)

Geek Stuff

  • Piotrovski noted that 1/6th of the return delta between strong and weak firms is earned over the four three-day periods surrounding subsequent earnings announcements, suggesting that the underlying cause is that the market is too slow to appreciate improved financial performance.
  • He also made clear that the paper "does not purport to find the optimal set of financial ratios for evaluating the performance prospects of individual “value” firms" - rather, it is just one way that investors can use relevant historical information to eliminate firms with poor future prospects from a generic value portfolio.

Watch out for

  • The Pietroski F-Score is not intended to be used on its own, but rather as an additional filter for a value screen. The starting point is taking the companies which fall into the bottom 20% of the market in terms of their price to book/NAV value.
  • His paper also states that the “benefits to financial statement analysis are concentrated in small and medium-sized firms, companies with low share turnover, and firms with no analyst following”. The reason for this is presumed to be the information gap – there is less likely to be a genuine mispricing for large companies that have a lot of analysts.

From the Source

The original 2002 paper can be found here: Value Investing: The use of historical financial statement information to separate winners from losers. It is well, well worth the read.

Piotroski also notes that analysts do not typically recommend value stocks. His interesting explanation for this is that analysts are typically stock-pickers whereas, on an individual stock basis, the typical value firm will underperform the market and analysts probably recognize that a value strategy relies on purchasing a complete portfolio of stocks.

About the author:

Dave Brickell
Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.1/5 (7 votes)


Parthbhatt - 8 years ago    Report SPAM
I am currently using his "value investing" paper for my graduate thesis. The paper is one of the best works on testing Book Value investing hypothesis. Thanks for posting this.
Toddius - 8 years ago    Report SPAM
I'm familiar with his paper. I wish there was a screener based on his score. Anyone aware of one or one in the works?
Cm1750 - 8 years ago    Report SPAM
Like Toddius, I am also interested if someone could direct me to any website that has current stocks that fit this criterion.

Thanks in advance.
Augustabound - 8 years ago    Report SPAM
From what I've seen, the screen at AAII is the only one.
Toddius - 8 years ago    Report SPAM
I think that's just a back screen - I meant an active screen....the way you can use the magic formula screener.
Augustabound - 8 years ago    Report SPAM
I'm not sure I understand.

I just checked the Piotroski screen at AAII and its data is current as of February 28th, so I would assume they update quarterly.

We're you referring to an active screen based on today's (or yesterday's) closing price for the price to book component?
Cm1750 - 8 years ago    Report SPAM
Can you post the link?

Toddius - 8 years ago    Report SPAM
I gotcha - I thought you were just referring to the link from AAII above. I found the screener. I don't have a sub to AAII, though. Any thoughts on its value as a resource? I'm thinking about signing up - it's only $29 per year?
Gurufocus premium member - 8 years ago
Our Guru Screener can filter with F-score and Z-score. We just added it.
Cm1750 - 8 years ago    Report SPAM
Can someone post the link to the AAII site. Does the AAII Piotroski screener work like the Magic Formula one where it will run the list based on market cap?
Toddius - 8 years ago    Report SPAM
Augustabound - 8 years ago    Report SPAM

Can someone post the link to the AAII site. Does the AAII Piotroski screener work like the Magic Formula one where it will run the list based on market cap?

No, it gives you their list ranked by lowest price to book and stocks that passed the Piotroski score of 8 or 9.

Yesterday returned about 8 stocks.

Toddius, I couldn't get your link to work. I'll post one just in case. And yes, $29 a year. I'm not a member, a friend is who gave me his log-in info. I'm going to get my own subscription soon. $43 Canadian........................shafted again by phantom forex charges :)

Rdj1234 - 8 years ago    Report SPAM

If you go to magicdilligence.com, click on tools, then look for screens, and click on alternative MFI screens, it gives Piotroski f scores by market cap, and index's. it also gives Greenblatt's MFI by market cap and index's, by rank, not by alphabet listing like Greenblatt's own site. I believe they are updated monthly.
Stockpickerman - 8 years ago    Report SPAM
The Joseph Piotroski F-Score article on MoneyCrashers has two free sources listed at the bottom. You'll need to verify the validity of the picks on the two sites yourself however. I start with the AAII site and modify it myself accordingly.
AlbertaSunwapta - 8 years ago    Report SPAM
Lifetime membership is available from AAII. (Consider it a donation to a great cause.)

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