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High F-Score value shares

Last year's F-Score shares delivered a total return of 15 per cent. This year the screen has highlighted 53 stock ideas from the FTSE All-Share, FTSE Small Cap and Aim indices.
August 26, 2015

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 ShareFTSE All Small FTSE Aim
NameTIDMTotal Return NameTIDMTotal Return NameTIDMTotal Return
GreggsGREG131%AlumascALUM40.0%Character GroupCCT166%
Barratt DevBDEV76.6%Air PartnersAIR27.4%Peel HotelsPHO44.2%
PendragonPDG46.9%Axa PropertyAPT18.4%AnimalcareANCR42.7%
Howden JoineryHWDN39.9%Dee ValleyDVW6.6%Unitech Corporate ParksUCP42.6%
Town Centre SecuritiesTCSC38.4%International Ferro MetalsIFL-84.4%RenewRNWH21.3%
BookerBOK36.8%---Allergy Ther.AGY10.2%
easyJetEZJ30.7%---Northern BearNTBR1.0%
AmlinAML28.5%---M WinkworthWINK0.5%
F&C Real Estate InvFCRE23.2%---Mission MarketingTMMG0.1%
SDLSDL15.1%---Volga GasVGAS-48.9%
WS AtkinsATK11.4%---Rambler Metals and MiningRMM-57.1%
SIGSHI3.9%---Forum EnergyFEP-70.0%
Coca-Cola HBCCCH3.3%------
Melrose IndustriesMRO-0.6%------
Hansa TrustHAN-8.5%------
Petra DiamondsPDL-14.3%------
Trinity MirrorTNI-30.6%------
Management Consulting GroupMMC-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

NameTIDMMkt capPDYEV/ FCFEV/SGV RatioP/BV3-mth MomNet Cash/ Debt(-)Cheap
888888£564m158p6.1%5.51.0-4.7-6.4%$163mEV/FCF, EV/S
B&M European Value Retail BME£3,371m337p1.0%1732.31.14.7-3.9%-£375mGV
Cambian  CMBN£539m293p0.6%41.93.00.82.16.9%-£189mGV
Carpetright CPR£386m569p-29.00.80.96.56.7%£1mGV, EV/S
CLS  CLI£782m1,845p-96.013.33.61.1-8.7%-£658mP/BV
Coca-Cola HBCCCH£4,930m1,354p1.9%14.80.91.32.4-11.6%-€1,201mEV/S
Debenhams DEB£995m81p4.2%30.60.61.71.2-17.9%-£297mP/BV, DY, EV/S
Direct Line Insurance  DLG£4,895m357p4.9%-1.31.31.65.1%£746mDY
easyJet EZJ£6,415m1,624p2.8%37.81.30.73.70.4%£416mGV
Enterprise Inns ETI£596m119p-1554.83.00.4-11.6%-£2,387mP/BV
F&C Private Equity Trust FPEO£161m224p4.9%-9.11.9--2.5%-£15mDY
First GroupFGP£1,325m110p--0.51.20.9-6.4%-£1,530mP/BV, EV/S
Grafton  GFTU£1,580m679p1.6%22.00.81.11.7-19.9%-£75mGV, EV/S
Johnston Press JPR£103m98p-19.11.16.90.5-39.0%-£183mP/BV, EV/S
Laird LRD£999m375p3.3%46.91.91.12.4-5.0%-£144mGV
Laura Ashley  ALY£200m28p7.3%12.00.61.14.6-18.7%£28mGV, DY, EV/S
Marshalls MSLH£644m328p1.8%35.91.90.83.68.9%-£34mGV
MITIE  MTO£1,008m293p4.0%12.10.50.92.8-8.4%-£185mGV, DY, EV/S
Pets at Home  PETS£1,400m280p2.6%52.02.21.11.8-2.3%-£186mGV
Poundland  PLND£874m350p1.7%57.10.81.53.93.9%£14mEV/S
Quintain Estates QED£687m131p-8.215.6-1.122.0%-£201mP/BV, EV/FCF
Rolls-Royce  RR.£13,514m735p3.1%-1.0-2.5-30.6%-£731mEV/S
Schroders SDR£7,196m2,746p2.8%10.11.90.6--24.2%£3,388mGV, EV/FCF
Sports Direct International SPD£4,587m775p--1.61.03.916.5%-£60mGV
TR PropertyTRY£960m302p2.5%7.34.01.7--8.5%-£47mEV/FCF, EV/S
Wolseley WOS£10,471m4,082p2.0%58.40.90.94.3-2.0%-£1,259mGV, EV/S
WPP WPP£17,548m1,354p2.8%11.41.70.92.3-16.2%-£2,275mGV, EV/FCF

 

FTSE ALL SMALL

NameTIDMMkt CapPDYEV/ FCFEV/SGV RatioP/BV3-mth MomNet Cash/ Debt(-)Cheap
Axa Property TrustAPT£36m47p--7.0-0.84.1%-£26mP/BV
Creston CRE£86m148p2.8%11.71.00.90.716.7%£8mP/BV, GV
Duet Real Estate Finance DREF1£18m25p21%2.31.30.10.5-31.2%£12mP/BV, GV, DY, EV/FCF
Electronic Data Processing EDP£9m68p5.9%2.70.61.31.8-6.5%£5mDY, EV/FCF, EV/S
J Smart & CoSMJ£47m102p2.9%5.51.533.80.5-2.1%£11mP/BV, EV/FCF
Titon  TON£10m91p3.3%28.30.42.00.97.1%£2mP/BV, EV/S

 

FTSE AIM ALL-SHARE

NameTIDMMkt CapPDYEV/FCFEV/SGV RatioP/BV3-mth MomNet Cash/ Debt(-)Cheap
GVC  GVC£262m427p10.2%9.21.10.42.3-11.1%€11mGV, DY
SQS Software Quality Systems SQS£188m600p1.6%9.90.71.42.5-6.9%€9mEV/S
Aukett Swanke  AUK£11m7p3.3%7.00.51.62.0-9.7%£3mEV/S
Christie  CTG£37m141p1.6%11.20.66.7-5.7%-£1mEV/S
Fevertree Drinks FEVR£529m459p0.3%108.711.90.59.140.4%£8mGV
Fulcrum Utility Services FCRM£28m18p2.2%28.60.70.225.321.7%£6mGV, EV/S
Interquest  ITQ£30m83p3.0%29.00.33.41.3-9.3%-£8mEV/S
Nakama  NAK£5m4p-15.50.20.42.5-7.6%-£1mGV, EV/S
Northern Bear NTBR£10m57p2.7%24.30.42.10.527.2%-£5mP/BV, EV/S
Peel Hotels PHO£15m107p2.8%45.31.6-0.62.7%-£11mP/BV
Robinson RBN£30m186p2.8%4.21.10.91.212.5%-£2mEV/FCF
Safestyle Uk SFE£192m246p5.0%24.81.31.06.917.4%£8mDY
STM  STM£29m49p-9.11.60.2-1.5%£3mGV
Swallowfield SWL£12m111p-33.20.20.31.2-4.5%£1mGV, EV/S
United Carpets  UCG£9m12p2.2%17.10.42.62.37.6%£3mEV/S
Gemfields GEM£351m65p-9.11.90.22.11.7%$19mGV
Plus500 PLUS£435m379p13.5%---6.153.4%$139mDY
Shanta Gold SHG£21m5p-3.50.40.040.3-34.7%-$38mP/BV, GV, EV/FCF 
Sylvania Platinum SLP£30m10p-5.60.5-0.5-9.9%$10mP/BV, EV/FCF, EV/S
Volga Gas VGAS£48m59p2.7%5.01.0-1.0-11.5%$16mDY, EV/FCF 

Source: S&P CapitalIQ