These selections continue as an ongoing test and active portfolios for members looking for value stocks using one of the best fundamental value models in the financial literature.
Piotroski Value Portfolio YTD Returns
The September 2019 selections comprise the 15th portfolio since 2017 formed to test the one-year buy/hold portfolios of the Joseph Piotroski Value algorithm that remains one of the best-performing value-based selection models in financial research.
The benefits to financial statement analysis are concentrated in small and medium-sized firms, companies with low share turnover, and firms with no analyst following, yet this superior performance is not dependent on purchasing firms with low share prices. A positive relationship between the sign of the initial historical information and both future firm performance and subsequent quarterly earnings announcement reactions suggests that the market initially underreacts to the historical information. ~ Joseph Piotroski
Retests of the Piotroski model continue to outperform all other top value algorithm models as most recently shown in the financial literature according to Amor-Tapia, B. & Tascón, M.T. (2016). The selections offered here also continue to include the Benjamin Graham enhancements described in the methods section below.
The one-year buy/hold from last year's September 2018 Piotroski-Graham portfolio was formed right before the major market declines from October to December and has returned -18.36% compared to the S&P 500 +0.21% over the same period. The enhanced Piotroski-Graham portfolio compares favorably to the AAII benchmark 2018 Piotroski portfolio that lost -36.10%.
Piotroski-Graham Portfolio Returns over 3 Years
This chart depicts the returns of each of the 14 tested Piotroski portfolios. Columns in blue represent the eight completed portfolios' annual returns. The black line represents returns since the formation of each portfolio. Average annual returns of all the completed one-year portfolios are -0.21% with 4/9 portfolios beating the S&P 500 in their respective one-year time periods.
Of the 6 active portfolios that have not completed a full year period, the January portfolio is the only value portfolio currently positive. The gains from the January 2019 Piotroski-Graham portfolio have returned +33.05% with all stocks positive and showing strong value opportunities in the current market with stocks like Micron Technology (MU), Taylor Morrison Home Corp. (TMHC), Willis Lease Finance Corporation (WLFC) doing very well.
The drawdown of this portfolio through some of the worst months on record in the past year remains relatively low and safe compared to many other portfolios and hedge funds returns in 2018. This is quite consistent with the findings that analyzed several of the top value algorithms in Amor-Tapia, B. & Tascón, M.T. (2016) and found Piotroski to be the top performer.
The strongest gains from the September 2018 portfolio came primarily from
Santander Consumer USA Holdings (SC) +20.99%
September 2019: Enhanced Piotroski - Graham Value Selections
These new selections for September have the highest Piotroski F-Scores of all the stocks screened across the US markets with a share price above $2 and average daily volume over 100k shares. In addition, the Benjamin Graham enhancements have been applied on the basis that these characteristics are well documented to deliver excess annual market returns. More information on the Graham Number formula can be found at the end of the article.
The following top Piotroski stocks also include only those stocks with positive differences in price from where the Graham number assesses current stock value. Surprisingly for the first time in many months, there is no overlap with a prior selection portfolio and this also marks an unusual shift to more financial stocks.
The smallest market cap stock is Employers Holdings (EIG) with $1.36B and the largest market cap is Synchrony Financial (SYF) with $22.09B. A sample of four of the eight stocks released here for consideration from this quantitative value model of high value/oversold stocks is listed as follows:
These selections are based entirely on the academic value algorithms documented in the modeling section at the end of this article and my own preset modeling enhancements of minimum trading volume and price. Value selections are intended for a one-year buy/hold methodology of highly undervalued fundamental characteristics.
1. Domtar Corporation (UFS) - Consumer Goods/Paper & Paper Products Domtar has a Graham % value difference that suggests an estimated price target of $43.38/share based on current valuations.
2. Employers Holdings Inc. - Financial/Accident & Health Insurance Employers Holdings has a Graham % value difference that suggests an estimated price target of $49.31/share based on current valuations.
3. Everest Re Group (RE) - Financial/ Property & Casualty Insurance Everest Re Group has a Graham % value difference that suggests an estimated price target of $280.4/share based on current valuations.
Introduction to Piotroski F-Score Methodology
This article continues the series of testing the best value investment research over a one-year time horizon for well-documented and substantial value-investing returns. This study is testing the Piotroski F-score model to see how many of the different value portfolios formed each month can outperform the market over a year-long period.
These Piotroski value selections are designed as a more stable, long-term investment approach to identify highly oversold stocks, in contrast to the Weekly Breakout Forecast based on highly volatile, short-term momentum stocks. The value selection formulas have been well-documented in the financial literature over the past 17 years to consistently outperform benchmark indexes.
- The Piotroski stock selections above build on the findings from the Amor-Tapia & Tascon (2016) research that evaluates top selection models in more detail in the initial August report that found the Piotroski model to be one of the best models tested for value investment selections.
- The American Association of Individual Investors also documents their own multi-year test results of the Piotroski F-score as one of the best-performing models with 16-year annualized total returns of 17.7% from among dozens of selection models that they monitor.
- These Enhanced Piotroski portfolios using Graham parameters and my own liquidity price/volume limits are greatly outperforming the AAII Benchmark Piotroski portfolios. These test portfolios have especially outperformed the AAII Piotroski 2018 returns of -36.1%.
All the prior value selections across all portfolios are applied to proprietary momentum algorithms on a daily/weekly screener to enhance the purchase timing of the best value stocks for members of my service. Hudbay Minerals (HBM) from the March 2019 portofolio is listed below in positive breakout condition for the week. A sample of the Weekly Top stocks across all portfolios from Friday is shown below:
Background on Value Scoring Systems
Calculating scores and assigning values to stocks based on fundamental data remains one of the most popular methods for value stock investing. Most of us are familiar with such scoring systems as the Value Line Rank (started in 1965), the CANSLIM composite ranking system (started in 1988), the Zacks Rank (started in 1982, first made public in 1992), and many other popular systems that have given us good results over the years. To this day, it is not uncommon to find substantial overlap among the best stocks identified by different value ranking methodologies. Most medium- to long-term investors are well served by taking these models into consideration.
Less well-known are the academic composite value models based on fundamentals that continue to be rigorously tested in peer-reviewed financial literature. Some of these published models have their measurement scoring integrated into publicly available stock screens from various stock analysis websites. One of the best academic models retested recently by Amor-Tapia and Tascon (2016) is the Piotroski score model created by Joseph Piotroski in 2000:
The Piotroski (2000) FSCORE: The Score consists of aggregating nine individual binary signals derived from accounting variables related to profitability. The most favorable value score is 9 and the least favorable is zero.
(Amor-Tapia &Tascon, 2016)
The Graham Number: Benjamin Graham, often called "the Father of Value Investing," first leveraged key financial ratios to identify undervalued companies with strong growth potential. The Graham Number value score results from a formula developed by Benjamin Graham that is based on his assessment that good value stocks should have a P/E ratio below 15 and a P/B ratio below 1.5:
This Graham Number value equals the square root of 22.5 x EPS x P/B. Because it leaves out many other important characteristics it is better applied as an enhancement to the highly successful Piotroski F-Score value selection model.
The Piotroski F-Score model has been well-documented in the financial literature and by practitioners to generate significant abnormal returns on an annual basis. This value model remains one of the top selection models among dozens also tracked by the American Association of Individual Investors.
First, value stocks tend to be neglected. As a group, these companies are thinly followed by the analyst community and are plagued by low levels of investor interest. Given this lack of coverage, analyst forecasts and stock recommendations are unavailable for these firms. Second, these firms have limited access to most "informal" information dissemination channels and their voluntary disclosures may not be viewed as credible given their poor recent performance. Therefore, financial statements represent the most reliable and most accessible source of information about these firms. Third,high BM firms tend to be "financially distressed"; as a result, the valuation of these firms focuses on accounting fundamentals such as leverage, liquidity, profitability trends, and cash flow adequacy. These fundamental characteristics are most readily obtained from historical financial statements. ~ Joseph Piotroski
Since my testing began of this Enhanced Piotroski-Graham model it has consistently outperformed the benchmark AAII Piotroski selection model and the S&P 500 in four out of nine samples so far. These enhanced model selections above also eliminate financial outliers and low-priced stocks that may jeopardize the best performance results possible. This is the monthly selection report for subscribers and these stocks have been entered into the Top Daily/Top Weekly breakout database.
I trust this will be a profitable contribution to your investment objectives!
JD Henning, PhD, MBA, CFE, CAMS
Amor-Tapia, B. & Tascón, M.T. (2016). Separating winners from losers: Composite indicators based on fundamentals in the European context *. Finance a Uver,66(1), 70-94.
Piotroski, J. D. (2000). Value investing: The use of historical financial statement information to separate winners from losers. Journal of Accounting Research, 38, 1-41.
Graham, B. (1949). The Intelligent Investor: The Definitive Book on Value Investing
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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.