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The Big Piotroski: Is Joseph Piotroski’s investment strategy better than Warren Buffett's?

The Stockpot column was inaugurated to act as a laboratory for investment ideas, and unlike a lot of lab experiments, hopefully things don't go horribly wrong
child at school
It's my first day in the job, cut me some slack if this goes belly up..!
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Value investing is almost always associated with its so-called ‘father’ Benjamin Graham and his most famous student, Warren Buffett.

Their investment strategies have been widely followed down the years, so much so that, some will argue, there’s no longer an edge to be gained by using them.

There is another value investor though, whose method is less well-known but has proven extremely popular in certain investment circles.

His name is Joseph Piotroski. ‘Who’s that?’ I hear you ask. Well, until last week I wasn’t too sure either, but I heard his strategy is a potential money-maker, so I decided to delve a bit deeper.

Nine boxes to tick

Back in 2000, while working as an accounting professor at Stanford, he came up with what is now known as the Piotroski F-Score.

It is a set of nine rules that tries to identify underlying improvements in companies’ fortunes, looking at things such as strong liquid balance sheets, increasing profitability, and operating efficiency. If you’re really interested, I’ve included the exact criteria below:

  • Positive net income
  • Positive return on assets in the current year
  • Positive operating cash flow in the current year
  • Cash flow from operations being greater than net income (quality of earnings)
  • Lower ratio of long-term debt in the current period, compared to the previous year (decreased leverage)
  • Higher current ratio this year compared to the previous year (more liquidity)
  • No new shares were issued in the last year (lack of dilution)
  • A higher gross margin compared to the previous year
  • A higher asset turnover ratio compared to the previous year

For every box a company ticks, it gets a point. The more ticks, the better the value of the stock and vice versa (supposedly).

The thinking behind it is that it can help to highlight solid, undervalued companies before the market cottons on, and the system's past performance would suggest that it has a fighting chance of working.

Had an investor bought all the companies with scores of 8 or 9 and shorted those with 0 or 1 next to their name, Piotroski claimed they would have earned a 23% annual return between 1976 and 1996. That’s 7.5% higher than what the S&P 500 posted over the same timeframe.

But does the strategy still work today? A few people online have said that it does, so I learned how to use a stock screen and gave it a whirl.

The 'Piotroski 9'

Piotroski’s research showed that the F-Score worked far better on smaller companies, so I ran the screen on the 850 or so companies currently trading on AIM.

Only nine firms passed all of Piotroski’s checks: metal basher Braime Holdings PLC (LON:BMTO); egg-free cake shop chain Cake Box Holdings PLC (LON:CBOX); billing systems firm Cerillion PLC; tech group Cohort PLC (LON:CHRT); blood test manufacturer Ekf Diagnostics Holding PLC (LON:EKF); Falkland-focused FIH Group Plc (LON:FIH); zinc miner Griffin Mining PLC (LON:GFM); chocolatier Hotel Chocolat Group PLC (LON:HOTC); and security systems specialist Synectics PLC (LON:SNX).

Straight off the bat, I’ve got concerns over Hotel Chocolat and Griffin Mining, which have both struggled this year, while Cohort and Braime have surged in recent months, so I’m worried they might have run out of steam. Still, in for a penny, in for a grand (literally).

My boss has generously given me a virtual £10,000 to spend on these stocks, but I’m only going to use £9,000 and trouser the rest…

Ticker

Company

Shares owned

Cost of shares*

Cost per share

Current bid price

Current value

Change

% change

BMT

Braime

60

£1,000

1,650p

1,450p

£870.00

-£130.00

-13.0%

CBOX

Cake Box

550

£1,000

180p

175p

£962.50

-£37.50

-3.8%

CER

Cerillion

682

£998.90

145p

137p

£934.34

-£64.56

-6.5%

CHRT

Cohort

230

£999

430p

410p

£943.00

-£56.00

-5.6%

EKF

Ekf Diag.

3,640

£1,000.08

27.2p

26.7p

£971.88

-£28.20

-2.8%

FIH

FIH Group

330

£1,000

300p

290p

£957.00

-£43.00

-4.3%

GFM

Griffin Mining

916

£999.28

108p

105p

£961.80

-£37.48

-3.7%

HOTC

Hotel Chocolat

314

£999.10

315p

305p

£957.70

-£41.40

-4.1%

SNX

Synectics

450

£1,000

220p

200p

£900.00

-£100.00

-10.0%

*Includes £10 dealing fee per trade

  • Cash: £3.74
  • Value of the portfolio (inc cash): £8,458.22
  • Starting value of portfolio (November 2018): £9,000

The plan is to let this run for six months, after which the market has *hopefully* realised that these are top companies and should be valued more highly.

Although, given the size of some of spreads, we’ve had our wings clipped somewhat and are more than £500 in the red before we’ve even started. Onwards and upwards though in our quest to F-Score big!


© biotech Capital 2019

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