Finding Value With The Piotroski F-Score: Year 2, Part 2

by: Rupert Hargreaves


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

The strategy recommended building a portfolio of 20 longs and 20 shorts.

In part one 20 companies were picked out that scored highly on the Piotroski F-Score criteria.

Another 20 companies were picked out with the lowest scores.

Part two takes a look at how the portfolio has performed over the past three months.

This is the second in a series of 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.

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.

Last year I ran a model, long only Piotroski portfolio, which produced some disappointing results mainly because of the portfolio's overweight position in oil. The long only portfolio ended the year down 49.32%.

This year I'm using both a long and short portfolio to test the F-score. As before, the screening criteria and investments are based purely on the financials. On the long side, 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. On the short side, the short basket is composed of companies that have the lowest F-Score in my screen. Unlike the long portfolio, there's no consideration for book value on the short side. For liquidity issues, I'm excluding any companies with a market cap. of less than $100m from my short basket. For the full explanation see here.

The companies that qualified on the long side at inception were:

NRG Energy (NYSE:NRG), Noble Corp (NYSE:NE), Darling Ingredients (NYSE:DAR), EP Energy (NYSE:EPE), DigitalGlobe (NYSE:DGI), McDermott International (NYSE:MDR), Atwood Oceanics (NYSE:ATW), Cash America International (NYSE:CSH), Navigator Holdings (NYSE:NVGS), Danaos Corporation (NYSE:DAC), DHT Holdings (NYSE:DHT), Roadrunner Transportation Systems (NYSE:RRTS), Century Aluminum (NASDAQ:CENX), Ocean Rig UDW NASDAQ:ORIG), West Marine (NASDAQ:WMAR), Marchex (NASDAQ:MCHX), Luby's (NYSE:LUB), Manning and Napier (NYSE:MN), Hardinge (NASDAQ:HDNG), Trans World Entertainment Corporation (NASDAQ:TWMC).

And on the short side (in order of market cap):

Vertex Pharmaceuticals (NASDAQ:VRTX), Tesla Motors (NASDAQ:TSLA), Under Armour (NYSE:UA), International (ADR) (NASDAQ:CTRP), BioMarin Pharmaceutical (NASDAQ:BMRN), Endo International (NASDAQ:ENDP), Annaly Capital Management (NYSE:NLY), OneMain Holdings (NYSE:LEAF), Seattle Genetics (NASDAQ:SGEN), STERIS (NYSE:STE), Renren (NYSE:RENN), Southwestern Energy Company (NYSE:SWN), Impax Laboratories (NASDAQ:IPXL), bluebird bio (NASDAQ:BLUE), The Medicines Company (NASDAQ:MDCO), SolarCity Corp (NASDAQ:SCTY), HRG Group Inc (NYSE:HRG), Federal National Mortgage Assctn Fnni Me (OTCQB:FNMA), Prothena Corporation PLC (NASDAQ:PRTA), Nord Anglia Education Inc (NYSE:NORD).

Current performance

How has the portfolio performed to date?

Figures taken before market open on 01/20/2016.

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. For the sake of simplicity I'm looking at capital values only and not including income, borrowing costs or trading costs.

Unfortunately, the long portfolio is overweight oil and industrials, so has been pushed down in line with the oil price over the past two months. Still, gains on the short side have offset gains on the long side and an overall return of -0.6% compared to the S&P 500's return of -7.52% over the period is extremely impressive. Moreover, performance figures taken after the close on 01/20/2016 show a -0.18% return on original investment, meaning that over the period the F-Score portfolio outperformed the S&P 500 by 7.34%.

So overall, the F-Score portfolio is proving its worth despite the overweight oil position. The portfolio's performance is vastly ahead of where it was this time last year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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