Top Piotroski-Graham Long-Term Value Stocks: July 2021 Semi-Annual Selections

Summary

• These value picks mark the 21st portfolio formed since 2017 to evaluate the top-rated one-year buy/hold models of the Joseph Piotroski & Benjamin Graham value algorithms.
• The past 6 value portfolios have returned: Jan 2021 +42.4%, Jul 2020 +50.4%, Mar 2020 +22.2%, Jan 2020 +2.8%, Nov 2019 -7.2%, and Sep 2019 +39.8%.
• For 2021, the value portfolios have been beating all other V&M portfolio models YTD except the MDA breakouts, Bounce/Lag Momentum and Top ETFs.
• All of the January selections are positive YTD led by DCOM +114.6%, and PBFX +60.9%, the one-year July portfolio is up +50.4%.
• All 10 different V&M portfolios beat the S&P 500 in 2020. The Piotroski-Graham is up +42.40% from January and beating the S&P 500 again for 2021.
• This idea was discussed in more depth with members of my private investing community, Value & Momentum Breakouts. Learn More »

Gary Yeowell/DigitalVision via Getty Images

Top Piotroski-Graham Long Term Value Stocks: July 2021 Semi-Annual Selections

These top 10 selections for July 2021 comprise the 21st 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 peer-reviewed financial research. The portfolios are now released 2 times per year in January/July.

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 have been improved to include the Benjamin Graham enhancements and additional enhancement parameters described in the methods section below.

The one-year buy/hold portfolio from last year's July 2020 Piotroski-Graham selections are also all positive YTD. The July portfolio returned +50.4% and included top gains from Costamare (CMRE) +130.2% and Dorian LPG (LPG) +94.0%. These gains suggest that value selections are gaining in strength with many undervalued stocks providing strong long term returns.

Piotroski-Graham Portfolio Returns From Formation

July 2021: Piotroski/Graham Value Enhanced Selections

These new selections for July 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.

These stocks meet the qualifying price/Graham number values less than one. According to historical long term results, these stocks have very high investment value from oversold levels that should deliver strong long term gains. Additionally, none of these stocks had any red-flags from the Beneish M-Score forensic algorithm that checks for earnings manipulation or financial irregularities:

(UncleStock)

Overall Scores Independent of the Piotroski-Graham Algorithms

An independent ranking of these firms using other value and growth scores is shown below that may provide additional insight into the risk of these firms.

(Source: StockRover)

Financial sector stocks comprise a large 70% representation among the new Piotroski-Graham value stocks for July 2021. The remaining stocks include Residential Construction, Steel, and Air Services. Quick-look charts of these extreme value stocks are shown below to begin the long term buy/hold measurement period.

CNO Financial Group, Inc. (CNO)

Enova International, Inc. (ENVA)

Meritage Homes Corporation (MTH)

Zions Bancorporation, National Association (ZION)

(Source: FinViz)

Review of July 2020 1-year Piotroski/Graham Value Enhanced Selections

The ten stocks from the prior 1 year July 2020 Piotroski-Graham selections with current returns

July 2020 one-year returns to date

Symbol	Company	Current Price	Start Price	Return from Selection
(CMRE)	Costamare Inc	11.74	5.1	130.20%
(LPG)	Dorian LPG Ltd	14.26	7.35	94.01%
(SCS)	Steelcase Inc.	14.78	10.34	42.94%
(LEN.B)	Lennar Corporation Class B	80.45	44.92	79.10%
(ALL)	Allstate Corp	129.57	94.09	37.71%
(DHT)	DHT Holdings Inc.	6.43	5.1	26.08%
(MTH)	Meritage Homes Corp	94.59	73.48	28.73%
(TM)	Toyota Motor Corp	176.73	126.39	39.83%
(TNK)	Teekay Tankers Ltd.	14.09	12.51	12.63%
(EURN)	Euronav NV	9.21	8.15	13.01%

Click to enlarge

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 & Tascón (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 17-year annualized total returns of 13.7%.

• These Enhanced Piotroski portfolios using Graham parameters and my additional liquidity price/volume limits consistently outperform the AAII Benchmark Piotroski portfolios down -41.8% in 2020, -19.1% in 2019, and -36.1% in 2018.

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 yet 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 reason for maintaining top value selections throughout the year: 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, Bounce/Lag 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 Tascón (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 & Tascón, 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.

Conclusion

The Piotroski F-Score model has been well-documented in the financial literature and by practitioners to generate significant excess returns on an annual basis. In addition, the enhanced value model selections above also eliminate financial outliers and low-priced stocks that may jeopardize the best performance results possible. This value model remains one of the top selection models among dozens also tracked by the American Association of Individual Investors. The advantage of this model is described by Joseph Piotroski from his published research:

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 combination of the Piotroski-Graham value model, it has consistently outperformed the benchmark AAII Piotroski selection models every year.

As we see more rotation into value stocks again, I trust this will be a profitable contribution to your investment objectives in 2021!

JD Henning, PhD, MBA, CFE, CAMS

References

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

Analyst’s 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.