Finding Value With The Piotroski F-Score Part 2

**This article first appeared on Seeking Alpha and was published on 06/02/2015.

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.

In this series of articles I’m testing the F-Score, as both a way to discover value stocks and trade them without fundamental analysis, the screening criteria and investments are based purely on the financials. 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.

I’ve made a slight change to the assessment since publishing part one. In part one I noted that the stocks in the portfolio would be sold after they reverted back to a P/B value of 1. However, I’ve now changed the criteria to more closely reflect Piotroski’s test and the stocks will be sold after one year. The companies that met all of criteria were: Noble (NYSE:NE), Ternium SA (NYSE:TX), Unit (NYSE:UNT)Ocean Rig (NASDAQ:ORIG), CYS Investments (NYSE:CYS), Pacific Drilling (NYSE:PACD), Hornbeck Offshore Services Inc (NYSE:HOS), OM Inc. (NYSE:OMG), Speedy Motorsports (NYSE:TRK), Gulfmark Offshore Inc (NYSE:GLF), Schnitzer Steel Industries Inc (NASDAQ:SCHN), Bill Barrett (NYSE:BBG), Penn Virginia (NYSE:PVA), Steel Excel Inc (OTCQB:SXCL)McClatchy Co (NYSE:MNI), Ducommun Inc (NYSE:DCO), Vantage Drilling Co (NYSEMKT:VTG), Nuverra Environmental (NYSE:NES), Willis Lease Finance (NASDAQ:WLFC) and Ellington Residential Mortgage (NYSE:EARN).

Current performance

How has the portfolio performed to date?

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Values taken just after close of trading 02/05/2015

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.

Unfortunately, the portfolio is overweight oil, so has been pushed down in line with the oil price over the past two months. The stand out performers were Ducommun Inc, up 13%, OM Group, up 9.2% and Speedway Motorsports Inc., up 16.3%.

The dogs of the portfolio so far have turned out to be Nuverra Environmental, down 58%, Pacific Drilling, down 43.8% and Vantage Drilling, down 42.35% during the period.

Overall, since inception the portfolio has fallen 17.9%, losing $3,578.57.

I’m tempted here to provide some commentary on how the company’s have performed and why they have performed as such but that’s not the point. The Piotroski F-Score is designed to be used with financials only and no fundamental analysis.

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