Stock Screen Strategy and Backtest Series
- NCAV NNWC Screen Strategy Backtest
- CROIC and ROIC Screen Strategy
- Negative Enterprise Value Screen Strategy
- Free Cash Flow Screen and Backtest
Joseph Piotroski is an academic professor who published a paper in 2002 titled, Value Investing: The use of historical financial statement information to separate winners from losers.
The paper itself is a great read, but can be simplified down to the following criteria a company should exhibit in order to receive high marks based on his studies.Piotroski Criteria
- 1. Positive return on assets in the current year (1 point)
- 2. Positive operating cash flow in the current year (1 point)
- 3. Higher return on assets (ROA) in the current period compared to the ROA in the previous year (1 point)
- 4. Cash flow from operations are greater than ROA (1 point)
Leverage, Liquidity and Source of Funds
- 5. Lower ratio of long term debt to in the current period compared value in the previous year (1 point)
- 6. Higher current ratio this year compared to the previous year (1 point)
- 7. No new shares were issued in the last year (1 point)
- 8. A higher gross margin compared to the previous year (1 point)
- 9. A higher asset turnover ratio compared to the previous year (1 point)
The neat thing about going through the Piotroski score is that, it doesn’t require any higher degree of mathematics. This makes it that much more effective and easier to customize and analyze.
For example, I could easily modify the requirements to compare each criteria to the previous 2 or 3 years, instead of just accepting an increase from the previous year.
Piotroski’s paper demonstrates that simple accounting knowledge and fundamental analysis can prevent many mistakes but also outperform. In other words, the point of the Piotroski strategy is to identify the healthiest companies at cheap prices.Piotroski Screen Performance
The screen first looks at companies with low price to book ratios from the latest quarter and returns the top 20 stocks with the highest Piotroski score. Emphasis is placed on smaller cap companies and the screen assumes that a position is rebalanced every 6 months.
Breaking the screen performance into multiple time periods, the results are as follows.
The yearly performance numbers do not start from January and end at December. I started the back testing series around March, so I’ve kept the start and end points as March to try and be consistent. Not perfect, but the point is to see how Piotroski performs.Piotroski Stock Ideas based on TTM
To calculate the Piotroski automatically, you can download and use the free Piotroski stock spreadsheet to calculate the numbers quickly as well as be able to compare previous years. The premium stock value calculator will also save you a ton of time by automatically performing 3 different types of valuations and immediately displaying fundamental data and analysis. Will cut your workload exponentially.
You can also get more Piotroski stock ideas from the Piotroski stock screener.