As the dot.com boom raged, US accountancy professor Joseph Piotroski was exploring a simple and powerful idea that was most out of tune with the obsessions of the time: the pursuit of go-go tech stocks. The idea in question was to screen for cheap stocks with improving fundamentals. The system he devised to do this was executed beautifully and outlined in his acclaimed 2000 paper 'Value investing: The use of historical financial statement information to separate winners from losers'.
While Mr Piotroski list of nine criteria – each one worth one point to his F-Score grading of stocks – is an elegantly woven interplay of various company fundamentals (for those of use that like pouring through company accounts at least), it’s perhaps fair to describe his choice of valuation metric as somewhat more basic. Indeed, Mr Piotroski plumped for the old classic value measure of price-to-book (P/BV). This is a valuation metric that has been popular with value investors since being given prominence by the father of value investing, Benjamin Graham.
Fans of P/BV tend to like the metric for two main reasons. Given that BV represents a company’s estimate of the value of its asset base, buying stocks below BV suggest that in the worst-case scenario there may be downside protection based on the money that could be generated from a company selling off the assets it owns. That said, the value given to assets by a company’s balance sheet, especially operating assets, can often prove way short of realisable value.
The other main reason to like P/BV is that it may highlight a company that is experiencing a temporary reduction in the returns it is achieving from its asset base. In this case, a low P/BV could identify a situation where earnings are temporarily depressed but are set to come roaring back, pushing the shares higher.
The Piotroski screen I’ve run for this column for several years P/BV has done well, although results have been volatile. What’s more, Mr Piotroski found that between 1976 and 1996, a long-short strategy based on P/BVs and F-Scores led to a 23 per cent annual return. However, the use of P/BV to identify value does lead to limitations. That’s because stocks with low P/BV tend to belong to companies with large asset bases – a key component of the BV part of the equation – which usually means they are capital-intensive businesses.
Three years ago I decided to see what would happen if I broadened out the definition of value used by the screen to take in other measures of value. To date the results have not been too bad and last year saw particularly strong returns from small-caps (see table).
2016 F-Score value performance
FTSE All-Share | FTSE All Small | FTSE Aim All-Share | ||||||
Name | TIDM | Total return (17 Aug 2016 - 17 Aug 2017) | Name | TIDM | Total return (17 Aug 2016 - 17 Aug 2017) | Name | TIDM | Total return (17 Aug 2016 - 17 Aug 2017) |
Jimmy Choo | CHOO | 108% | North Midland Con. | NMID | 239% | Airea | AIEA | 103% |
Wizz Air | WIZZ | 82% | Waterman | WTM | 87% | Amiad Water Systems | AFS | -21% |
McColl's | MCLS | 64% | Triad | TRIA | 67% | Augean | AUG | 18% |
Raven Russia | RUS | 32% | Mithras Inv Trst | MTH | 35% | Digital Globe Services | DGS | 24% |
Daejan | DJAN | 18% | Alumasc | ALU | 34% | Finsbury Food | FIF | -7% |
Spirent | SPT | 18% | Highcroft Investments | HCFT | 12% | NewRiver Reit | NRR | 17% |
McBride | MCB | 14% | FTSE All Small | - | 21% | Pan African Resources | PAF | -35% |
Servelec | SERV | 5.3% | F-Score Value | - | 79% | Peel Hotels | PHO | -2% |
Capital & Regional | CAL | -0.6% | Personal Group Holdings | PGH | -13% | |||
Go-Ahead | GOG | -2.1% | Plastics Capital | PLA | 10% | |||
DFS Furniture | DFS | -5.2% | Safeland | SAF | -3% | |||
Restaurant Group | RTN | -8.5% | Serica Energy | SQZ | 89% | |||
Kingfisher | KGF | -12% | Sopeon | SPE | 57% | |||
Stagecoach | SGC | -12% | Thalassa | THAL | 91% | |||
INTU Properties | INTU | -15% | Victoria Oil & Gas | VOG | 24% | |||
Debenhams | DEB | -23% | FTSE Aim All-Share | - | 30% | |||
FTSE All-Share | - | 13% | F-Score Value | - | 23% | |||
F-Score Value | - | 16% |
Source: S&P Capital IQ
The cumulative total return from the screen since I started to run it three years ago is 50.4 per cent, compared with 32.3 per cent from a three-way blend of the FTSE All-Share, FTSE All Small and FTSE Aim indices.
The screen is conducted separately on the constituents of the FTSE All-Share, FTSE All-Small and FTSE Aim indices so as to reduce its natural skew towards smaller companies (smaller companies tend to command lower valuations on average due to the perception that they are more risky). While the number of shares from each index passing the screen’s tests varies, each of the three portfolios are given equal weightings in my assessment of the screen’s results.
Looked at on an index by index basis, the FTSE Small Cap screen has been the most impressive performer, while the FTSE All-Share version of the screen is the only one to underperform the market on a cumulative basis (see graphs).
2017 F-Score value shares
FTSE All-Share
Name | TIDM | Mkt cap | Price | Fwd NTM PE | DY | EV/FCF | EV/sales | GV ratio | P/BV | 3-month momentum | Net cash/debt (-) | Cheap |
CRH | CRH | £24bn | 2,690p | - | 2.1% | 31 | 1.1 | 0.6 | - | -0.8% | -€6.5bn | EV/S |
United Utilities | UU. | £6.2bn | 911p | 20 | 4.3% | - | 7.8 | 2.3 | 2.2 | -13% | -£7.1bn | P/BV,EV/FCF,EV/S |
WPP | WPP | £18bn | 1,420p | 11 | 4.2% | 15 | 1.5 | 0.9 | 1.9 | -15% | -£4.7bn | P/BV,EV/S |
Marston's | MARS | £715m | 113p | 8 | 6.6% | - | 2.4 | 1.3 | 0.8 | -18% | -£1.5bn | GV |
Ferguson | FERG | £12bn | 4,582p | 15 | 2.3% | 31 | 0.8 | 0.9 | 3.7 | -7.0% | -£1.3bn | GV |
Bunzl | BNZL | £7.7bn | 2,329p | 21 | 1.8% | 53 | 1.2 | 11 | 5.8 | -5.2% | -£1.2bn | EV/S |
Jardine Lloyd Thompson | JLT | £2.5bn | 1,180p | 18 | 2.8% | 26 | 2.2 | 0.8 | 7.4 | 0.9% | -£441m | EV/FCF,EV/S |
Royal Mail | RMG | £4.0bn | 398p | 10 | 5.8% | 14 | 0.4 | 3.1 | 0.8 | -7.5% | -£358m | GV,EV/S |
Keller | KLR | £596m | 829p | 9 | 3.5% | 36 | 0.5 | 0.7 | 1.4 | -3.6% | -£297m | P/BV,DY |
F&C Commercial Property Trust | FCPT | £1.2bn | 150p | - | 4.0% | 66 | 22 | 6.7 | 1.1 | 3.0% | -£223m | P/BV |
Tritax Big Box REIT | BBOX | £2.0bn | 144p | 21 | 4.4% | 73 | 23 | 3.2 | 1.1 | -1.9% | -£206m | GV |
NEX | NXG | £2.6bn | 675p | 23 | 5.7% | - | - | - | - | 4.3% | -£191m | P/BV,DY |
Picton Property Income | PCTN | £462m | 86p | 21 | 3.9% | 36 | 12 | - | 1.0 | -0.9% | -£173m | GV |
Fenner | FENR | £663m | 342p | 19 | 1.0% | 21 | 1.3 | 0.6 | 2.1 | 9.3% | -£145m | GV,EV/S |
Standard Life Inv Property Inc Trst | SLI | £356m | 91p | - | 5.2% | - | 15 | 3.4 | 1.1 | 2.6% | -£115m | GV |
Grafton | GFTU | £1.9bn | 795p | 15 | 1.7% | 29 | 0.8 | 1.9 | 1.8 | 2.3% | -£96m | GV |
F&C UK Real Estate Investments | FCRE | £257m | 107p | 21 | 4.7% | 34 | 18 | - | 1.1 | 1.9% | -£93m | GV,EV/S |
Cape | CIU | £317m | 263p | 8 | 1.0% | 6.6 | 0.4 | - | 2.6 | 6.0% | -£75m | EV/S |
Forterra | FORT | £553m | 277p | 11 | 2.5% | 14 | 2.0 | 1.0 | 5.8 | 4.8% | -£69m | EV/S |
Custodian REIT | CREI | £408m | 115p | 13 | 5.5% | 46 | 17 | 5.3 | 1.1 | 1.8% | -£58m | GV |
Redrow | RDW | £2.2bn | 604p | 9 | 2.0% | 108 | 1.5 | 0.5 | 2.0 | 6.8% | -£56m | GV |
Huntsworth | HNT | £245m | 75p | 13 | 2.4% | 30 | 1.5 | 0.4 | 1.6 | 49% | -£27m | GV,EV/S |
Robert Walters | RWA | £369m | 516p | 16 | 1.7% | 15 | 0.3 | 0.7 | 3.4 | 16% | £18m | P/BV,EV/S |
F&C Private Equity Trust | FPEO | £237m | 321p | - | 3.9% | - | 3.8 | 1.0 | - | -11% | £32m | P/BV,GV,EV/FCF,EV/S |
Headlam | HEAD | £508m | 601p | 15 | 3.9% | 13 | 0.6 | 1.4 | 2.6 | -7.3% | £50m | P/BV,DY |
Page | PAGE | £1.5bn | 488p | 18 | 2.5% | 25 | 1.1 | 1.1 | 5.6 | 2.6% | £89m | DY |
Brewin Dolphin | BRW | £972m | 354p | 17 | 3.8% | 15 | 2.8 | 0.8 | - | 5.6% | £154m | EV/S |
3i | III | £9.1bn | 950p | 10 | 1.7% | 9.0 | 5.4 | - | - | 14% | £356m | GV,DY,EV/S |
Kingfisher | KGF | £6.5bn | 299p | 12 | 3.5% | 20 | 0.5 | 2.2 | 1.0 | -11% | £597m | P/BV |
Royal Dutch Shell | RDSB | £192bn | 2,167p | - | 6.7% | 26 | 0.9 | 0.8 | - | -0.2% | -$66bn | P/BV |
Glencore | GLEN | £50bn | 353p | 14 | 1.5% | 11 | 0.4 | 0.8 | 1.4 | 21% | -$28bn | GV |
Rio Tinto | RIO | £65bn | 3,615p | 12 | 4.9% | 9.8 | 2.0 | 0.9 | 2.0 | 15% | -$7.3bn | GV |
Anglo American | AAL | £19bn | 1,324p | 9 | 2.8% | 8.1 | 1.1 | 3.3 | 1.1 | 22% | -$5.5bn | GV,DY,EV/FCF |
Petrofac | PFC | £1.5bn | 440p | 6 | 12.1% | - | 0.3 | 0.5 | 1.7 | -29% | -$1.2bn | GV,EV/S |
Antofagasta | ANTO | £10bn | 996p | 23 | 2.0% | 23 | 2.8 | 0.6 | 1.8 | 24% | -$860m | GV,DY,EV/S |
Petropavlovsk | POG | £216m | 7p | - | - | 1072 | 1.3 | - | 0.5 | -13% | -$599m | P/BV,DY,EV/S |
4imprint | FOUR | £479m | 1,709p | 21 | 2.4% | 15 | 0.8 | 2.3 | 22 | -1.6% | $33m | EV/S |
Fresnillo | FRES | £12bn | 1,564p | 28 | 1.6% | 40 | 5.7 | 0.6 | 5.3 | -1.0% | $86m | P/BV,DY |
Anglo-Eastern Plantations | AEP | £329m | 830p | 7 | 0.4% | 12 | 1.1 | 19 | 1.1 | 4.4% | $92m | P/BV,DY |
Spirent Communications | SPT | £600m | 98p | 18 | 3.0% | 11 | 1.1 | 1.3 | 2.3 | -22% | $110m | DY |
Lamprell | LAM | £338m | 99p | - | - | 1.5 | 0.2 | 0.1 | 0.8 | -4.4% | $268m | GV,DY |
Randgold Resources | RRS | £7.1bn | 7,565p | 27 | 1.0% | 19 | 5.2 | 1.0 | 2.6 | 6.2% | $570m | EV/FCF |
FTSE All-Small
Name | TIDM | Mkt cap | Price | Fwd NTM PE | DY | EV/FCF | EV/sales | GV ratio | P/BV | 3-month momentum | Net cash/debt (-) | Cheap |
4imprint | FOUR | £479m | 1,709p | 21 | 2.4% | 15 | 0.8 | 2.3 | 22 | -1.6% | $33m | EV/S |
Axa Property Trust | APT | £14m | 60p | - | - | 1.1 | 1.3 | - | 0.9 | 3.7% | £10m | P/BV,EV/FCF |
Cape | CIU | £317m | 263p | 8 | 1.0% | 6.6 | 0.4 | - | 2.6 | 6.0% | -£75m | EV/FCF,EV/S |
Centaur Media | CAU | £78m | 54p | 16 | 5.6% | 14 | 1.2 | - | 1.2 | 8.0% | -£10m | DY |
Creightons | CRL | £19m | 31p | - | 0.7% | 19 | 0.6 | 15 | 2.2 | 47% | £2m | EV/S |
Custodian REIT | CREI | £408m | 115p | 13 | 5.5% | 46 | 17 | 5.3 | 1.1 | 1.8% | -£58m | DY |
F&C UK High Income Trust | FHI | £124m | 104p | - | 4.5% | 9.3 | 5.0 | 1.2 | - | -2.3% | -£5m | DY |
F&C UK Real Estate Investments | FCRE | £257m | 107p | 21 | 4.7% | 34 | 18 | - | 1.1 | 1.9% | -£93m | DY |
Fenner | FENR | £663m | 342p | 19 | 1.0% | 21 | 1.3 | 0.6 | 2.1 | 9.3% | -£145m | GV |
Haynes Publishing | HYNS | £26m | 175p | 20 | 4.3% | 7.0 | 0.9 | 0.7 | 1.1 | 7.0% | £1m | GV,EV/FCF,EV/S |
Headlam | HEAD | £508m | 601p | 15 | 3.9% | 13 | 0.6 | 1.4 | 2.6 | -7.3% | £50m | EV/S |
Huntsworth | HNT | £245m | 75p | 13 | 2.4% | 30 | 1.5 | 0.4 | 1.6 | 49% | -£27m | GV |
Keller | KLR | £596m | 829p | 9 | 3.5% | 36 | 0.5 | 0.7 | 1.4 | -3.6% | -£297m | GVEV/S |
Lamprell | LAM | £338m | 99p | - | - | 1.5 | 0.2 | 0.1 | 0.8 | -4.4% | $268m | P/BV,GV,EV/FCF,EV/S |
Petropavlovsk | POG | £216m | 7p | - | - | 1072 | 1.3 | - | 0.5 | -13% | -$599m | P/BV |
Robert Walters | RWA | £369m | 516p | 16 | 1.7% | 15 | 0.3 | 0.7 | 3.4 | 16% | £18m | GV,EV/S |
Standard Life Investments Property Income Trust | SLI | £356m | 91p | - | 5.2% | - | 15 | 3.4 | 1.1 | 2.6% | -£115m | DY |
FTSE Aim All-Share
Name | TIDM | Mkt cap | Price | Fwd NTM PE | DY | EV/FCF | EV/sales | GV ratio | P/BV | 3-month momentum | Net cash/debt (-) | Cheap |
Andrews Sykes | ASY | £235m | 555p | - | 4.3% | 22 | 3.3 | 3.2 | 4.9 | 9.4% | £18m | DY |
Anglo Asian Mining | AAZ | £29m | 25p | 7 | - | 6.0 | 0.7 | - | 0.4 | 46% | -$35m | P/BV,EV/FCF,EV/S |
Avingtrans | AVG | £45m | 236p | 262 | 1.4% | 1.6 | 0.8 | - | 1.3 | -1.3% | £28m | EV/FCF,EV/S |
Bilby | BILB | £24m | 61p | 7 | 2.9% | 5.2 | 0.4 | 0.9 | 1.8 | -22% | -£4m | EV/FCF,EV/S |
Billington | BILN | £30m | 253p | 10 | 4.0% | 6.9 | 0.4 | 0.6 | 1.6 | 1.0% | £4m | GV,DY,EV/FCF,EV/S |
Cambria Automobiles | CAMB | £59m | 59p | 7 | 1.6% | 13 | 0.1 | 0.8 | 1.3 | -20% | £3m | EV/S |
Dillistone | DSG | £10m | 53p | 59 | 7.9% | 9.4 | 0.9 | - | 1.5 | -40% | £1m | DY |
Filtronic | FTC | £27m | 13p | 11 | - | 17 | 0.7 | 2.2 | 2.5 | -4.6% | £3m | EV/S |
Frenkel Topping | FEN | £41m | 54p | 14 | 2.2% | 57 | 5.0 | 0.5 | - | -19% | £5m | GV |
GETECH | GTC | £10m | 26p | - | - | - | 1.0 | - | 0.8 | -27% | £2m | P/BV |
Goldplat | GDP | £9m | 6p | - | - | - | 0.5 | - | 0.5 | -17% | £0m | P/BV,EV/S |
Griffin Mining | GFM | £105m | 62p | 6 | - | 6.2 | 1.3 | 0.1 | - | 17% | -$24m | GV,EV/FCF |
Highland Gold Mining | HGM | £476m | 146p | 12 | 7.1% | 12 | 2.1 | 1.1 | 0.8 | -2.2% | -$205m | P/BV,DY |
IG Design | IGR | £239m | 379p | 19 | 1.2% | 14 | 0.8 | 1.3 | 2.8 | 15% | £3m | EV/S |
Impax Asset Management | IPX | £118m | 107p | - | 2.1% | 12 | 3.5 | 0.5 | - | 5.9% | £29m | GV |
M.P. Evans | MPE | £409m | 743p | 32 | 2.0% | - | 4.5 | 0.4 | 1.6 | 5.7% | $61m | GV |
Paragon Entertainment | PEL | £7m | 4p | 8 | - | 5.8 | 0.4 | - | 2.0 | -3.1% | £1m | EV/FCF,EV/S |
Parity | PTY | £10m | 10p | 8 | - | 10 | 0.2 | 0.6 | 1.6 | -16% | -£4m | GV,EV/S |
Prime People | PRP | £12m | 102p | - | 4.9% | 9.6 | 0.4 | 1.1 | 0.8 | 5.7% | £2m | P/BV,DY,EV/S |
Real Estate Investors | RLE | £106m | 57p | 17 | 4.6% | 46 | 14 | 1.3 | 0.9 | -5.8% | -£78m | DY |
Rotala | ROL | £29m | 61p | 10 | 3.9% | - | 1.0 | 1.2 | 0.9 | -1.6% | -£26m | DY |
Sylvania Platinum | SLP | £34m | 12p | 9 | - | 3.9 | 0.4 | - | 0.4 | 10% | $16m | P/BV,EV/FCF,EV/S |
TF & JH Braime | BMT | £12m | 843p | - | 1.1% | 339 | 0.5 | 11 | 1.2 | 0.0% | -£2m | EV/S |
Taptica International | TAP | £235m | 383p | 13 | 0.9% | 17 | 1.7 | 0.4 | 5.6 | 25% | $21m | GV |
TechFinancials | TECH | £5m | 7p | - | - | - | - | - | 0.7 | -7.1% | $7m | P/BV |
Trans-Siberian Gold | TSG | £39m | 36p | - | - | 7.8 | 0.9 | - | 0.6 | -2.7% | -$4m | P/BV |
Volga Gas | VGAS | £47m | 58p | - | 1.0% | 4.3 | 1.2 | 17.2 | 0.9 | -1.7% | $16m | EV/FCF |
Volvere | VLE | £29m | 715p | - | - | 7.7 | 0.4 | - | - | 5.9% | £16m | EV/S |
WYG | WYG | £65m | 93p | 7 | 1.9% | - | 0.4 | 2.6 | 2.1 | -7.5% | -£2m | EV/S |
Zoltav Resources | ZOL | £21m | 15p | - | - | 2.0 | 0.0 | - | 0.2 | -41% | -RUB1.6bn | P/BV,EV/FCF,EV/S |
Source: S&P Capital IQ