Finding Value With The Piotroski F-Score Part 4

by: Rupert Hargreaves


The Piotroski F-Score was designed to find companies that are cheap and recovering.

This is part four of a year-long series looking at the success and suitability of using the F-Score to select stocks for a portfolio.

To date, over the past four months the F-Score portfolio has returned negative 26.67%.

This is the fourth article in a series of twelve articles looking at the investment performance of the Piotroski F-Score over the space of year.

You can find the first part of this series, which explains the methodology behind the F-score, as well as an initial summary for each company, here.

The second part, assessing the portfolios performance up to the beginning of February can be found here. And part three can be found here.

A quick summary

Here's a quick summary of what this series aims to accomplish and what investors can take away from the figures. This is a copy of the text displayed in part two:

Finding value

The F-Score was designed to hunt out value opportunities that are profit-making, have improving margins, don't employ any accounting tricks and have strengthening balance sheets.

However, as usual, this strategy cannot be employed alone, it needs to be combined with another screening tool to produce a suitable set of results. One point is awarded for each criteria the company passes and the stocks that score the highest, eight, or nine are regarded as being the strongest candidates for recovery.

Piotroski recommended scoring the bottom 20% of the market in terms of price to book value and then working from there. Using the following system, Piotroski's April 2000 paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, demonstrated that the Piotroski score method would have seen a 23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted.

In this series of articles I'm testing the F-Score, as both a way to discover value stocks and trade them without fundamental analysis, the screening criteria and investments are based purely on the financials. 20 companies have been selected, those that both meet Piotroski's criteria and were, at time of initial investment, trading below book value per share.

The stocks will be sold after one year. The companies that met all of criteria were: Noble (NYSE:NE), Ternium SA (NYSE:TX), Unit (NYSE:UNT) Ocean Rig (NASDAQ:ORIG), CYS Investments (NYSE:CYS), Pacific Drilling (NYSE:PACD), Hornbeck Offshore Services Inc (NYSE:HOS), OM Inc. (NYSE:OMG), Speedy Motorsports (NYSE:TRK), Gulfmark Offshore Inc (NYSEMKT:GLF), Schnitzer Steel Industries Inc (NASDAQ:SCHN), Bill Barrett (BBG), Penn Virginia (PVA), Steel Excel Inc (OTCQB:SXCLD) McClatchy Co (NYSEMKT:MNI), Ducommun Inc (NYSE:DCO), Vantage Drilling Co (NYSEMKT:VTG), Nuverra Environmental (NYSEMKT:NES), Willis Lease Finance (NASDAQ:WLFC) and Ellington Residential Mortgage (NYSE:EARN).

Current performance

How has the portfolio performed to date?

Values taken before market open 01/04/2015.

The portfolio has a hypothetical $1,000 invested in each company, excluding commissions. These positions are based on financial data only, there's no weighting to fundamental factors.

Unfortunately, over the past month the F-Score portfolio performance has only deteriorated.

A dividend of $0.375 per Noble Corp share was paid to investors on February 6. The dividend totaled $18. There have been no other dividends paid since. Including this contribution, the portfolio's year to date decline has now increased to 26.67%, from -21.6% as reported at the beginning of February. Month-on-month the portfolio has declined 6.40%. The S&P 500 lost 1.74% over the same period. The F-Score portfolio has underperformed the S&P 500 by 26.23% year to date.

Vantage Drilling and Nuverra Environmental continued to push the overall portfolio lower, declining by around 600bps and 700bps respectively during the period. Willis Lease Finance lost 1231bps during the period, which was by far the worst performance. Speedway Motorsports, OM Group and Ducommun led the pack for the fourth month in a row as a lack of exposure to the oil industry allowed the three companies to benefit from wider equity market strength.

Leading the pack, Ducommun Inc gained 312bps during the period continuing its positive performance for the year.

I'm tempted here to provide some commentary on how the companies have performed and why they have performed as such but that's not the point. The Piotroski F-Score is designed to be used with financials only and no fundamental analysis.

Still, it's clear that the portfolio's high exposure to oil can be described as the reason behind the underperformance seen over the period.

Disclosure: The author is long TX.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.