The Piotroski 9 strategy, formulated by Accounting Professor Joseph Piotroski, is a 9 criteria formula that is tracked by AAII. Any good value investor should pay close attention to the turnover, margin, leverage, liquidity, earnings quality (and credibility) and potential for dilution for any stock. Many of the screens on AAII, and other sites, evaluate just one or two of these criteria, but only the Piotroski 9 screen addresses ALL of them. It should thus come as little surprise that over the past 12 years the Piotroski 9 screen has outperformed all other AAII screens and in fact has achieved 8,800%+ returns since 1998 compared to 8.1% for the S&P500.
The other key reason Piotroski 9 has been so successful is that in assessing cheapness, it evaluates the purest measure of value: the price relative to book ratio (P/BV). Only stocks trading in the bottom 20% of the market on P/BV are considered. Earnings for a company can be highly volatile but assets/liabilities (and by derivation, book value), should be relatively stable.
I have decided to take the Piotroski screen one step further than AAII. AAII relies only on annual reports when running their Piotroski 9 screen, meaning that they look at year end filings (which could be as old as December 2009) to run their screen. I have decided to take it one step further and use the latest quarterly filings to run my screens (i.e.: using trailing twelve month data instead of annual data). Among the more interesting picks I came up with was a gem called Cagle’s Inc. (NYSEMKT:CGL.A). Let me know your thoughts and if I am missing something, but this looks like a phenomenal opportunity which recorded 37.6% ROAE last quarter. Below are Piotroski’s 9 criteria, which, as you can see, Cagle’s passes all 9. Bear in mind that it is a very low market cap stock (~$30mm), which is a very good things, as far as I am concerned, because it implies no institutional coverage, and plenty of room for market inefficiency that makes it a Piotroski 9 candidate.
Year over year growth:
LTM ROA > Previous LTM? Yes
Cash flow from operations > Net income? Yes
ROA and cash flow from operations > 0? Yes
Long term debt / assets: Down
Current ratio: Up
Weighted Average Shares: Flat
Gross margin: Up (negative in 2008); also up last twelve months vs. yoy
Disclosure: No positions
Disclosure: Cagles, long position