My attempt to put Joseph Piotroski's F-Score to work across a range of valuation metrics has produced good results over the past 12 months. When Mr Piotroski, an American accountancy professor, came up with his F-Score, he was interested in high-scoring stocks that also had low price-to-book-value ratios (P/BV). P/BV is a classic value measure, which owes much of its popularity to its use by Benjamin Graham, who is often considered 'the father of value investing'. In his 2000 paper 'Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers', Mr Piotroski highlighted that he found a long-short strategy that combined P/BV and F-Scores produced a 23 per cent annual return between 1976 and 1996.
But while Mr Piotroski focused on low P/BV to assess value in his famous paper, the F-Score is a broad measure of quality that looks at more than just a company's assets. Indeed, the F-Score comprises nine tests that look at the historic income statements, balance sheets and cash flows of a company. Given the breadth of these tests, it seems reasonable to think the F-Score may be of value when combined with valuation metrics other than P/BV. What's more, a focus on low P/BV stocks means a classic Piotroski screen tends to focus on a certain type of situation - companies with large asset bases, which in practice often means capital-intensive businesses.
The F-Score screen I conducted this time last year was an attempt to broaden out the Piotroski approach by hunting for high F-Score stocks that were cheap on one of five valuation measures: P/BV, dividend yield (DY), enterprise-value-to-sales (EV/S), enterprise-value-to-free-cash-flow (EV/FCF) and a dividend- and cash-adjusted price-to-earnings-growth ratio (GV).
In order to avoid the screen being biased towards small-caps (valuations tend to be most extreme among small-caps, which can skew this screen's results) I screened the FTSE All-Share, FTSE Small Cap and Aim All-Share separately. In aggregate, the 35 shares selected a year ago significantly outperformed the market, producing a total return of 15.9 per cent compared with 1.3 per cent from the FTSE All-Share, 8.1 per cent from the All Small, and a negative 2.3 per cent from Aim.
F-Score value vs FTSE All-Share
Source: Thomson Datastream
F-Score Value performance 28 August 2014 - 19 August 2015
FTSE All Share | FTSE All Small | FTSE Aim | ||||||
---|---|---|---|---|---|---|---|---|
Name | TIDM | Total Return | Name | TIDM | Total Return | Name | TIDM | Total Return |
Greggs | GREG | 131% | Alumasc | ALUM | 40.0% | Character Group | CCT | 166% |
Barratt Dev | BDEV | 76.6% | Air Partners | AIR | 27.4% | Peel Hotels | PHO | 44.2% |
Pendragon | PDG | 46.9% | Axa Property | APT | 18.4% | Animalcare | ANCR | 42.7% |
Howden Joinery | HWDN | 39.9% | Dee Valley | DVW | 6.6% | Unitech Corporate Parks | UCP | 42.6% |
Town Centre Securities | TCSC | 38.4% | International Ferro Metals | IFL | -84.4% | Renew | RNWH | 21.3% |
Booker | BOK | 36.8% | - | - | - | Allergy Ther. | AGY | 10.2% |
easyJet | EZJ | 30.7% | - | - | - | Northern Bear | NTBR | 1.0% |
Amlin | AML | 28.5% | - | - | - | M Winkworth | WINK | 0.5% |
F&C Real Estate Inv | FCRE | 23.2% | - | - | - | Mission Marketing | TMMG | 0.1% |
SDL | SDL | 15.1% | - | - | - | Volga Gas | VGAS | -48.9% |
WS Atkins | ATK | 11.4% | - | - | - | Rambler Metals and Mining | RMM | -57.1% |
SIG | SHI | 3.9% | - | - | - | Forum Energy | FEP | -70.0% |
Coca-Cola HBC | CCH | 3.3% | - | - | - | - | - | - |
Melrose Industries | MRO | -0.6% | - | - | - | - | - | - |
Hansa Trust | HAN | -8.5% | - | - | - | - | - | - |
Petra Diamonds | PDL | -14.3% | - | - | - | - | - | - |
Trinity Mirror | TNI | -30.6% | - | - | - | - | - | - |
Management Consulting Group | MMC | -34.8% | - | - | - | - | - | - |
F-Score Value All-Share | - | 22.0% | F-Score Value All Small | - | 1.6% | F Score Value Aim | - | 12.8% |
FTSE All-Share | - | 1.3% | FTSE Small Cap | - | 8.1% | FTSE Aim | - | -2.3% |
Source: Thomson Datastream
Looking at the performance of the screen relative to the individual indices that the stocks were selected from, it was only the FTSE Small Cap Screen that underperformed. This is partly down to the fact that I included stocks that were both members of the All Share and All Small only in the All-Share screen results. This meant the All Small screen produced only a handful of stocks and one of them performed terribly (International Ferro Metals). It's interesting to note that International Ferro was one of two stocks that appeared 'cheap' against four out of the five value measures used by the screen. The other stock that showed similar levels of apparent value was Trinity Mirror, and its shares also performed poorly, producing a 31 per cent negative return. Arguably, this underlines the point that shares that look very cheap often do so for very good reason, even when they have a high F-Score.
F-Score value screens vs indices (28 Aug 2014 - 19 Aug 2015)
Source: Thomson Datastream
One of the real strengths of Mr Piotroski's F-Score, at least in my opinion, is that it is interested in a company's direction of travel rather than simply whether it looks attractive against a given metric at a given point in time. For example, the stocks can score by showing improving earnings or an improving current ratio, regardless of what level earnings or the current ratio are at.
The factors Mr Piotroski's F-Score looks at also often reinforce each other. Indeed, there are several tests he uses to check that any progress being made is being achieved by the company as a result of its own endeavours rather than use of debt (falling-gearing test) or equity fundraising (no-change-in-shares-in-issue test). Meanwhile, Mr Piotroski's search for earnings improvements is backed up by his tests for cash generation, which is designed to weed out companies where improvements may be an accounting fiction.
F-Score tests:
■ 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 as a signal that a company may be in recovery mode and in the process of re-rating. ■ Cash from operations is higher than profit after tax, excluding exceptional items, which indicates 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 upcoming financial obligations is improving. ■ No new shares issued over the past 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 net assets), which suggest greater productivity. |
Mr Piotroski considered a high F-Score to be 8 and above. To pass the screen a company must have a high F-Score and its shares must be among the cheapest quarter of those in its index (All-Share, Small Cap or Aim) based on one or more of the five value measures tested (P/BV, DY, EV/S, EV/FCF or GV). This year, 53 stocks have been selected by the screen, details of which are in the tables that follow.
FTSE ALL-SHARE
Name | TIDM | Mkt cap | P | DY | EV/ FCF | EV/S | GV Ratio | P/BV | 3-mth Mom | Net Cash/ Debt(-) | Cheap |
---|---|---|---|---|---|---|---|---|---|---|---|
888 | 888 | £564m | 158p | 6.1% | 5.5 | 1.0 | - | 4.7 | -6.4% | $163m | EV/FCF, EV/S |
B&M European Value Retail | BME | £3,371m | 337p | 1.0% | 173 | 2.3 | 1.1 | 4.7 | -3.9% | -£375m | GV |
Cambian | CMBN | £539m | 293p | 0.6% | 41.9 | 3.0 | 0.8 | 2.1 | 6.9% | -£189m | GV |
Carpetright | CPR | £386m | 569p | - | 29.0 | 0.8 | 0.9 | 6.5 | 6.7% | £1m | GV, EV/S |
CLS | CLI | £782m | 1,845p | - | 96.0 | 13.3 | 3.6 | 1.1 | -8.7% | -£658m | P/BV |
Coca-Cola HBC | CCH | £4,930m | 1,354p | 1.9% | 14.8 | 0.9 | 1.3 | 2.4 | -11.6% | -€1,201m | EV/S |
Debenhams | DEB | £995m | 81p | 4.2% | 30.6 | 0.6 | 1.7 | 1.2 | -17.9% | -£297m | P/BV, DY, EV/S |
Direct Line Insurance | DLG | £4,895m | 357p | 4.9% | - | 1.3 | 1.3 | 1.6 | 5.1% | £746m | DY |
easyJet | EZJ | £6,415m | 1,624p | 2.8% | 37.8 | 1.3 | 0.7 | 3.7 | 0.4% | £416m | GV |
Enterprise Inns | ETI | £596m | 119p | - | 155 | 4.8 | 3.0 | 0.4 | -11.6% | -£2,387m | P/BV |
F&C Private Equity Trust | FPEO | £161m | 224p | 4.9% | - | 9.1 | 1.9 | - | -2.5% | -£15m | DY |
First Group | FGP | £1,325m | 110p | - | - | 0.5 | 1.2 | 0.9 | -6.4% | -£1,530m | P/BV, EV/S |
Grafton | GFTU | £1,580m | 679p | 1.6% | 22.0 | 0.8 | 1.1 | 1.7 | -19.9% | -£75m | GV, EV/S |
Johnston Press | JPR | £103m | 98p | - | 19.1 | 1.1 | 6.9 | 0.5 | -39.0% | -£183m | P/BV, EV/S |
Laird | LRD | £999m | 375p | 3.3% | 46.9 | 1.9 | 1.1 | 2.4 | -5.0% | -£144m | GV |
Laura Ashley | ALY | £200m | 28p | 7.3% | 12.0 | 0.6 | 1.1 | 4.6 | -18.7% | £28m | GV, DY, EV/S |
Marshalls | MSLH | £644m | 328p | 1.8% | 35.9 | 1.9 | 0.8 | 3.6 | 8.9% | -£34m | GV |
MITIE | MTO | £1,008m | 293p | 4.0% | 12.1 | 0.5 | 0.9 | 2.8 | -8.4% | -£185m | GV, DY, EV/S |
Pets at Home | PETS | £1,400m | 280p | 2.6% | 52.0 | 2.2 | 1.1 | 1.8 | -2.3% | -£186m | GV |
Poundland | PLND | £874m | 350p | 1.7% | 57.1 | 0.8 | 1.5 | 3.9 | 3.9% | £14m | EV/S |
Quintain Estates | QED | £687m | 131p | - | 8.2 | 15.6 | - | 1.1 | 22.0% | -£201m | P/BV, EV/FCF |
Rolls-Royce | RR. | £13,514m | 735p | 3.1% | - | 1.0 | - | 2.5 | -30.6% | -£731m | EV/S |
Schroders | SDR | £7,196m | 2,746p | 2.8% | 10.1 | 1.9 | 0.6 | - | -24.2% | £3,388m | GV, EV/FCF |
Sports Direct International | SPD | £4,587m | 775p | - | - | 1.6 | 1.0 | 3.9 | 16.5% | -£60m | GV |
TR Property | TRY | £960m | 302p | 2.5% | 7.3 | 4.0 | 1.7 | - | -8.5% | -£47m | EV/FCF, EV/S |
Wolseley | WOS | £10,471m | 4,082p | 2.0% | 58.4 | 0.9 | 0.9 | 4.3 | -2.0% | -£1,259m | GV, EV/S |
WPP | WPP | £17,548m | 1,354p | 2.8% | 11.4 | 1.7 | 0.9 | 2.3 | -16.2% | -£2,275m | GV, EV/FCF |
FTSE ALL SMALL
Name | TIDM | Mkt Cap | P | DY | EV/ FCF | EV/S | GV Ratio | P/BV | 3-mth Mom | Net Cash/ Debt(-) | Cheap |
---|---|---|---|---|---|---|---|---|---|---|---|
Axa Property Trust | APT | £36m | 47p | - | - | 7.0 | - | 0.8 | 4.1% | -£26m | P/BV |
Creston | CRE | £86m | 148p | 2.8% | 11.7 | 1.0 | 0.9 | 0.7 | 16.7% | £8m | P/BV, GV |
Duet Real Estate Finance | DREF | 1£18m | 25p | 21% | 2.3 | 1.3 | 0.1 | 0.5 | -31.2% | £12m | P/BV, GV, DY, EV/FCF |
Electronic Data Processing | EDP | £9m | 68p | 5.9% | 2.7 | 0.6 | 1.3 | 1.8 | -6.5% | £5m | DY, EV/FCF, EV/S |
J Smart & Co | SMJ | £47m | 102p | 2.9% | 5.5 | 1.5 | 33.8 | 0.5 | -2.1% | £11m | P/BV, EV/FCF |
Titon | TON | £10m | 91p | 3.3% | 28.3 | 0.4 | 2.0 | 0.9 | 7.1% | £2m | P/BV, EV/S |
FTSE AIM ALL-SHARE
Name | TIDM | Mkt Cap | P | DY | EV/FCF | EV/S | GV Ratio | P/BV | 3-mth Mom | Net Cash/ Debt(-) | Cheap |
---|---|---|---|---|---|---|---|---|---|---|---|
GVC | GVC | £262m | 427p | 10.2% | 9.2 | 1.1 | 0.4 | 2.3 | -11.1% | €11m | GV, DY |
SQS Software Quality Systems | SQS | £188m | 600p | 1.6% | 9.9 | 0.7 | 1.4 | 2.5 | -6.9% | €9m | EV/S |
Aukett Swanke | AUK | £11m | 7p | 3.3% | 7.0 | 0.5 | 1.6 | 2.0 | -9.7% | £3m | EV/S |
Christie | CTG | £37m | 141p | 1.6% | 11.2 | 0.6 | 6.7 | - | 5.7% | -£1m | EV/S |
Fevertree Drinks | FEVR | £529m | 459p | 0.3% | 108.7 | 11.9 | 0.5 | 9.1 | 40.4% | £8m | GV |
Fulcrum Utility Services | FCRM | £28m | 18p | 2.2% | 28.6 | 0.7 | 0.2 | 25.3 | 21.7% | £6m | GV, EV/S |
Interquest | ITQ | £30m | 83p | 3.0% | 29.0 | 0.3 | 3.4 | 1.3 | -9.3% | -£8m | EV/S |
Nakama | NAK | £5m | 4p | - | 15.5 | 0.2 | 0.4 | 2.5 | -7.6% | -£1m | GV, EV/S |
Northern Bear | NTBR | £10m | 57p | 2.7% | 24.3 | 0.4 | 2.1 | 0.5 | 27.2% | -£5m | P/BV, EV/S |
Peel Hotels | PHO | £15m | 107p | 2.8% | 45.3 | 1.6 | - | 0.6 | 2.7% | -£11m | P/BV |
Robinson | RBN | £30m | 186p | 2.8% | 4.2 | 1.1 | 0.9 | 1.2 | 12.5% | -£2m | EV/FCF |
Safestyle Uk | SFE | £192m | 246p | 5.0% | 24.8 | 1.3 | 1.0 | 6.9 | 17.4% | £8m | DY |
STM | STM | £29m | 49p | - | 9.1 | 1.6 | 0.2 | - | 1.5% | £3m | GV |
Swallowfield | SWL | £12m | 111p | - | 33.2 | 0.2 | 0.3 | 1.2 | -4.5% | £1m | GV, EV/S |
United Carpets | UCG | £9m | 12p | 2.2% | 17.1 | 0.4 | 2.6 | 2.3 | 7.6% | £3m | EV/S |
Gemfields | GEM | £351m | 65p | - | 9.1 | 1.9 | 0.2 | 2.1 | 1.7% | $19m | GV |
Plus500 | PLUS | £435m | 379p | 13.5% | - | - | - | 6.1 | 53.4% | $139m | DY |
Shanta Gold | SHG | £21m | 5p | - | 3.5 | 0.4 | 0.04 | 0.3 | -34.7% | -$38m | P/BV, GV, EV/FCF |
Sylvania Platinum | SLP | £30m | 10p | - | 5.6 | 0.5 | - | 0.5 | -9.9% | $10m | P/BV, EV/FCF, EV/S |
Volga Gas | VGAS | £48m | 59p | 2.7% | 5.0 | 1.0 | - | 1.0 | -11.5% | $16m | DY, EV/FCF |
Source: S&P CapitalIQ