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|
|China Food Co||CFC||44||23||-47.7%|
|FTSE All Share||-8.9%|
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
Table: the Piotroski shares for 2012
*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
Last IC view: 51p, Good value, 14 June 2011
Packaging machinery group
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
Last IC view: Fairly priced, 119p, 10 September 2010
Last IC view: Fairly priced, 102p, 26 September 2011
Last IC view: Fairly priced, 190p, 27 July 2011
Weak construction markets are bad news for
Last IC View: Buy, 20p, 16 Nov 2011
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