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David Chulak
David Chulak
Articles (77) 

Joseph Piotroski Picks: Part 1

June 14, 2011 | About:

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 (NYSE:LM)

F-Score = 8

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

The E.W. Scripps Co. (NYSE:SSP)

F-Score = 7

Held by two gurus: Mario Gabelli, Joel Greenblatt

Benchmark Electronics (NYSE:BHE)

F-Score = 8

Held by one guru: Ken Fisher

AU Optronics Corp. (NYSE:AUO) (ADR)

F-Score = 8

Held by one guru: Ken Fisher

Renesola Ltd. (NYSE:SOL) (ADR)

F-Score = 8

All gurus sold out

Disclosure: I have no position in any of the stocks

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

Rating: 2.9/5 (9 votes)


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