In 2000, Joseph Piotroski released a value trading system that would rock the investment world. He created a system called the FSCORE that would fundamentally rate value stocks on 9 different points.
In brief he analyzed the profits, operating efficiency, as well as the solvency and liquidity of the companies that had very high book to market ratios. The idea is that companies with high intrinsic value with increasing fundamentals would out-perform other value stocks and the market in general.
The controversial result was an average of 23% annual gain over a 20 year test period (1976 – 1996), which is more than double the market average. This was also 7.5% higher than the average value stock return. Of course, his system included shorting value stocks that ranked very poorly. (Read another controversial article where few fund and hedge managers who post believe 14% annual gain is possible.)
The 9 Point Piotronski System
His value investing system included analyzing the following: return of assets, the change in ROA, cash flow from operations, difference between ROA and CFO, change in gross margin, change in asset turnover, change in financial leverage and in liquidity, and finally if shares were diluted in the last year.
Strong fundamental stocks with high intrinsic worth with increasing value were shown to be some of the top performing value stocks.
Highly Ranked S&P 500 Stocks Using FSCORE
I have made my best attempt to closely follow this numbers-based accounting theory for growth stocks. The highest ranking stocks in my list are as follows:
- Amerisourcebergen (ABC)
- Air Products & Chemicals (APD)
- Amphenol (APH)
- Chicago Mercantile Exchange Holdings (CME)
- Deere (DE)
- DeVry (DV)
- Intuit (INTU)
- Lilly (LLY)
- Southwest Airlines (LUV)
- NASDAQ OMX (NDAQ)
- News Corp. (NWSA)
- JM Smucker (SJM)
- SanDisk (SNDK)
- Visa (V)
Of this list, those with the lowest P/B ratio, or the highest book to price ratio, are considered the top picks. This would include such stocks as CME, LUV, NDAQ, NWSA, SJM, and marginally V. These picks have a P/B ratio of roughly 2 or less.
In future articles I will further analyze stocks that are considered short picks by his system, and a variety of highly ranking FSCORE stocks in many stock universes including small-caps.
Criticisms of the System
Of course, it should be mentioned that there are criticisms of this system. In September 200, Wayne Guay, from The Wharton School University of Pennsylvania, wrote a paper that raised some though provoking questions.
In a nutshell, not all the value stocks picked using FSCORE result in fantastic returns. A large portion have OK returns or below average, and some have stellar returns. The paper questions as why there were abnormally large returns in the FSCORE system, and if this could be repeated over time. The implication was that some bias was entered in, or some unknown factor that influenced his value stock population to have these ‘cherry-picked’ stocks. However, it appears that the paper only raised more questions without providing any conclusive answers to…well, anything at all.
In conclusion, if this type of deep and increasing value system appeals to you, consider reading his original works and perform your own due diligence on each of these S&P 500 highly ranking FSCORE stocks.