These January 2020 picks mark the 17th portfolio formed since 2017 to evaluate the top-rated one-year buy/hold models of the Joseph Piotroski & Benjamin Graham Value algorithms.
The 1 year Piotroski-Graham value portfolio from January 2019 is up +38.92% with all the stocks gaining more than 5% and two stocks gaining 70%.
The Piotroski-Graham model remains one of the top-performing value model in financial research and continues to outperform long term with some additional enhancements.
These selections are tracked for more than a year and published 6 times per year with the two most recent portfolios positive from November +5.81% and September +17.04%.
January trends follow the prior two portfolio formations, with high concentrations of undervalued financial and basic material sector stocks.
These selections continue as ongoing tests and active portfolios for members looking for value stocks using one of the best fundamental value models in the financial literature with enhancements.
Piotroski Value Portfolio YTD Returns
The eight January 2020 selections comprise the 17th 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 portfolios are released 6 times per year with the last article: Top Piotroski-Graham Value Stocks For November 2019
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 recently shown in peer-reviewed financial literature according to Amor-Tapia, B. & Tascón, M.T. (2016). The selections offered here also have been boosted to include the Benjamin Graham enhancements and additional parameters described in the methods section below.
The one-year buy/hold portfolio from last year's January 2019 Piotroski-Graham selections has returned 38.92% compared to the S&P 500 +28.88% over the same period.
January 2020: Piotroski/Graham Value Enhanced Selections
These new selections for January have the highest Piotroski F-Scores of all the stocks screened across the US markets with a share price above $3 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 sample of top Piotroski stocks from the full list provided to members also include only those stocks with positive differences in price from where the Graham number assesses current stock value. Murphy Oil (NYSE:MUR) and FGL Holdings (NYSE:FG) are both prior top selections from September that have gained 47.01% and 33.46%, respectively, and continue with strong positive valuations.
The financial sector is highly represented in this month's selection as in prior months and shows many undervalued firms in this sector. Several stocks return from the September and November Piotroski-Graham portfolios. Four stocks released here for consideration from this quantitative value model of high value/oversold stocks are listed as follows:
These selections are based 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.
Qudian Inc. (QD) - Technology / Information Tech Services(FinViz)
Qudian Inc. provides online small consumer credit products in the People's Republic of China. It uses big data-enabled technologies, including artificial intelligence and machine learning to transform the consumer finance experience. The company offers small credit products, such as cash credit products; merchandise credit products to finance borrowers' direct purchase of merchandise offered on its marketplace on installment basis; and budget auto financing products. In addition, it operates a platform for loan recommendations and referrals.
Murphy Oil Corporation operates as an oil and gas exploration and production company in the United States, Canada, Malaysia, and internationally. It explores for and produces crude oil, natural gas, and natural gas liquids. The company was formerly known as Murphy Corporation and changed its name to Murphy Oil Corporation in 1964.
FGL Holdings sells individual life insurance products and annuities in the United States. The company offers deferred annuities, including fixed indexed annuity contracts and fixed rate annuity contracts; immediate annuities; and life insurance products. It also provides reinsurance on asset intensive, long duration life, and annuity liabilities, such as fixed, deferred and payout annuities, long-term care, group long-term disability, and cash value life insurance. (StockRover)
Popular, Inc. (BPOP) - Financial / Foreign Regional Banks
Popular, Inc., through its subsidiaries, provides various retail, mortgage, and commercial banking products and services. The company accepts various deposit products. It also offers commercial and industrial loans; commercial real estate loans; residential mortgage loans; consumer loans, including personal loans, credit cards, automobile loans, home equity lines of credit, and other loans to individual borrowers; construction loans; and lease financing comprising automobile loans/leases. In addition, the company provides investment banking, broker-dealer, and insurance services.
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 additional liquidity price/volume limits are greatly outperforming the AAII Benchmark Piotroski portfolios. My enhanced value portfolios have significantly outperformed the AAII Piotroski 2018 returns of -36.1% and 2019 returns of -29.4%.
The values and methodologies from Joseph Piotroski and Benjamin Graham were devised for long-term value approaches that differ significantly from growth or momentum strategies. Like many models, they can cycle in/out of favor as economic conditions and markets change. The benefit of the inclusion of the different types of models that I offer is to identify when these larger cycles begin to shift and readers can reap significant gains from changing models. Additionally, there has been no other value strategy tested in the financial literature that has beaten the Piotroski approach in all the peer-reviewed studies over competitive 1-year tests.
Cycles can shift dramatically and this is another important component in my recent article: Value Picks Crush Momentum In First Major Reversal Since 2009: What's Next
In a separate process, all the prior value stock picks from these Piotroski-Graham portfolios are applied to proprietary momentum algorithms on a daily/weekly database to track and identify the best purchase timing for members of my service. This live update page also serves as a trend tracker to see when different value, growth, MDA breakout, B/L Momentum, and forensic picks are outperforming. A sample of the Weekly Top stocks in breakout conditions across all portfolio types is shown below:
Background on Value Scoring Systems
Calculating scores and assigning values to stocks based on fundamental data remain 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 every year. These enhanced model selections above also eliminate financial outliers and low-priced stocks that may jeopardize the best performance results possible.
I trust this will be a profitable contribution to your investment objectives in 2020!
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 am/we are long FNGU. 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.