At the turn of the century, a Stanford University accounting professor named Joseph Piotroski was wrestling with the topic of value investing.
By that time, academic research had demonstrated the edge investors could get from buying shares with high book-to-market values (also known as lower price-to-book values). But as Piotroski noted, this strategy often relied on the outsized performance of a handful of cheap names while tolerating the “poor performance of many deteriorating companies”.
Concerned that most high book-to-market companies produced negative market-adjusted returns two years after their purchase, Piotroski set about devising a method to trim the considerable fat across the universe of value stocks.