The Piotroski F-Score Stock Screen is a value investing strategy to identify stocks of companies with good fundamentals and eliminate stocks of weak companies. The goal is to avoid value traps and only invest in real value stocks.
Value stocks are often values because the companies have encountered a challenge. Some companies will have the ability to overcome those challenges and others will not.
Joseph Piotroski developed a 9 point stock screen ranking system which has produced an incredible performance record of finding quality investments. You can read his entire paper here: Value Investing: The Use of Historical Financial Statement Informatiion to Separate Winners from Losers.
The American Association of Individual Investors (AAII) calculates a performance history of over 22% per year from 2003 – 2017 for the strategy.
George at Fat Pitch Financials does a great service for investors by completing backtest on various strategies. His Piotroski Score Backtest shows some amazing results! Check out the above graph.
Every total point score starting from 0 to 9 demonstrates an improvement in returns as the total points increase. In addition, total points of 0, 1, and 2 have negative returns. These results indicate that the Piotroski F Score is a bonafide strategy and a valuable stock screen.
How the Piotroski F-Score Stock Screen Works
The F-Score Test examines 9 tests in three areas: profitability, capital structure, and operating efficiency. Each test is given either 0 points for a fail or 1 point for a pass. All 9 tests can be derived from company financial statements.
Piotroski found that companies with 8 or 9 total points greatly improved the probability that the company had the ability to overcome challenges and eventually grow its stock price. Here are the 9 tests in the 3 areas:
Profitability (4 points)
Return on Assets
Return on assets (ROA) is net income before extraordinary items divided by total assets. If ROA is positive award 1 point; if negative, no points.
Cash Flow from Operations
Cash Flow From Operations is the cash inflows and outflows of a company’s core business operations. One point is awarded for positive cash flow from operations and none if it is negative.
Direction of Return on Assets
Did the return on assets increase this year over last year? Is so, award 1 point; if not, no points.
Accrual Accounting Check