Joseph Piotroski is a man for our times. The screen that the US accountancy professor devised over a decade ago is designed specifically to find shares that are cheap, but whose eye-catching valuations are less likely to be illusory and whose fundamentals are unlikely to deteriorate suddenly.
Previous experiments with it have produced mixed results. The first screen we ran back in November 2010 handsomely outperformed the market (11.6 per cent against 6 per cent for the FTSE All-Share), but the Piotroski screen we ran on 6 July last year has seriously underperformed. Based on ask-to-bid prices and excluding dividends and dealing costs, the July portfolio fell 20 per cent to the end of the year, compared with a 9 per cent decline in the FTSE All-Share index (see table).
| Company | TIDM | Ask, 6 Jul 2011 | Bid, 30 Dec 2011 | Performance |
|---|---|---|---|---|
| Fiberweb | FWEB | 60.75 | 53.5 | -11.9% |
| Augean | AUG | 30 | 26 | -13.3% |
| China Food Co | CFC | 44 | 23 | -47.7% |
| ATH Resources | ATH | 47 | 41 | -12.8% |
| Silverdell | SID | 11.5 | 11 | -4.3% |
| Metalrax | MTRX | 10.5 | 7.5 | -28.6% |
| Average | -19.8% | |||
| FTSE All Share | -8.9% |
Source: Datastream
Perhaps this underperformance should not be too surprising, as the kind of value and recovery plays that the screen aims to identify are inherently high risk and sensitive to wider market movements and rising risk aversion. Tthe screen is only interested in the lowest valued quarter of the market based on the price-to- book ratio (share price/equity per share) and tries to minimise the risks of hunting in this part of the market by insisting stocks pass at least eight out of the nine criteria set out below. Professor Piotroski's own back testing of the screen for US markets found that it produced annual returns of 23 per cent over the two decades to 1996, which was double the performance of the S&P 500.
The nine Piotroski criteria are:
■ Positive profit after tax, excluding exceptional items.
■ Positive cash from operations.
■ Profits after tax excluding exceptional items are up on last year, which professor Piotroski highlights as being of particular importance given the likelihood that stocks on low valuations may be in recovery mode and in the process of re-rating.
■ Cash from operations higher than profit after tax, excluding exceptional items, indicating an ability to convert accounting profit into actual cash.
■ Gearing (net debt as a percentage of net assets) is down on the preceding year, which suggests that the company has not had to look for external sources of finance.
■ The current ratio (current assets divided by current liabilities) is up on the preceding year, which suggests that the company's ability to service current debt obligations is improving.
■ No new shares issued over the last year, which again suggests that the company has not had to look for external sources of finance.
■ Gross margins have risen in the last year.
■ Improving capital turn (turnover as a proportion of last year's net assets), which suggest greater productivity.
We've excluded companies with market caps of less than £10m from the results due to the difficulties normally associated with dealing in their shares. However, for the record, sub-£10m market cap shares that passed the test where Havelock Europa and John Lewis of Hungerford. A number of companies in the screen also seem to be being priced down in anticipation of deterioration in trading, so the strong score reflects a good run that is expected to end by a market rather than the end of a bad run, which is what the screen is designed to spot.
Table: the Piotroski shares for 2012
| Name | TIDM | Market Cap | Price | Price/Book value* | Forecast PE ** | Yield (%) |
|---|---|---|---|---|---|---|
| ATH Resources | AIM:ATH | £17m | 43p | 0.6 | 39 | 7.1% |
| Molins | LSE:MLIN | £17m | 91p | 0.4 | 6 | 5.5% |
| Goldenport | LSE:GPRT | £60m | 66p | 0.4 | 9 | 8.2% |
| Speedy Hire | LSE:SDY | £101m | 20p | 0.4 | 11 | 2.0% |
| MJ Gleeson | LSE:GLE | £58m | 109p | 0.6 | na | na |
| Laird | LSE:LRD | £396m | 149p | 0.7 | 9 | 4.2% |
*Based on latest annual results, including intangible items; **Consensus EPS for next 12 months
Source: Capita IQ and Datastream
The Piotroski half dozen for 2012
UK-based coal miner ATH Resources makes frequent appearances in our Piotroski screens. However, the company is getting closer to a situation where the value highlighted by the screen could be realised. The prices the group is able to get for its coal are depressed by two legacy contracts, but over the next two years it will exit these contracts, and it has also managed to renegotiate prices on one of them from the start of this year. The group is also beginning to mine at Ducanziemere this year, which is another reason for cheer. Granted, costs are rising, but broker Seymour Pierce still thinks the shares could be worth 50p each.
Last IC view: 51p, Good value, 14 June 2011
Packaging machinery group Molins has been performing well recently. A trading update in October showed order intake was strong and the business was performing ahead of expectations thanks to cost cutting and a push into new markets such as Asia. The company's tobacco machinery division has been performing well of late and there are hopes that possible new regulations in the US could provide a major boost for this division. Meanwhile, the valuation is low against both the company's book value and its forecast dividend and earnings. At 90p, the shares are priced on just under six times research firm Edison's 2012 EPS forecast and yield 5.5 per cent.
Last IC view: Fairly priced, 95p, 26 August 2011
The shipping industry is in a tough spot at the moment, thanks to a downturn in world trade and a looming capacity glut, and Goldenport's share price reflects that uncertainty. But Goldenport is in a relatively good position compared with its peers. Its fleet is modern and its balance sheet is sound. Meanwhile, it has announced encouraging news on new charters and charter extensions in November. Even allowing for the uncertain outlook, the deep discount between its market value and fleet value looks unwarranted.
Last IC view: Fairly priced, 119p, 10 September 2010
MJ Gleeson's focus on building houses in the north of the country is doing its share price little good. But grim market conditions do at least mean Gleeson has the ability to pick up land at low prices, and the group also makes money in the south of England by buying unconsented land and selling it on with planning permission.
Last IC view: Fairly priced, 102p, 26 September 2011
Laird's low valuation is more in anticipation of trouble to come rather than recognition of past problems. Its shares have plummeted since Laird saw off a 185p a share bid from Cooper Industries last summer as investors worried about the cyclical nature of the technology and engineering group's end markets. However, as part of its bid defence, Laird's management promised to pay an 8p a share dividend for 2011 and 10p a share in 2012. That equates to a 5.3 per cent yield, rising to 6.7 per cent. What's more, Laird has exited a number of its commodity-style businesses and diversified its markets, which should help the business weather any downturn.
Last IC view: Fairly priced, 190p, 27 July 2011
Weak construction markets are bad news for Speedy Hire, which rents out kit to builders. However, the company has managed to move back into profit recently, thanks to a focus on higher-margin parts of the business and regulated industries such as water and waste. And hire businesses like Speedy are enormously operationally geared to cyclical upswings thanks to their large fixed cost bases.
Last IC View: Buy, 20p, 16 Nov 2011
