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Value investing on solid foundations

Value stocks with improving fundamentals, Piotroski style
September 5, 2017

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-ShareFTSE All SmallFTSE Aim All-Share
NameTIDMTotal return (17 Aug 2016 - 17 Aug 2017)NameTIDMTotal return (17 Aug 2016 - 17 Aug 2017)NameTIDMTotal return (17 Aug 2016 - 17 Aug 2017)
Jimmy ChooCHOO108%North Midland Con.NMID239%AireaAIEA103%
Wizz AirWIZZ82%WatermanWTM87%Amiad Water SystemsAFS-21%
McColl'sMCLS64%TriadTRIA67%AugeanAUG18%
Raven RussiaRUS32%Mithras Inv TrstMTH35%Digital Globe ServicesDGS24%
DaejanDJAN18%AlumascALU34%Finsbury FoodFIF-7%
SpirentSPT18%Highcroft InvestmentsHCFT12%NewRiver ReitNRR17%
McBrideMCB14%FTSE All Small-21%Pan African ResourcesPAF-35%
ServelecSERV5.3%F-Score Value-79%Peel HotelsPHO-2%
Capital & RegionalCAL-0.6%   Personal Group HoldingsPGH-13%
Go-AheadGOG-2.1%   Plastics CapitalPLA10%
DFS FurnitureDFS-5.2%   SafelandSAF-3%
Restaurant GroupRTN-8.5%   Serica EnergySQZ89%
KingfisherKGF-12%   SopeonSPE57%
StagecoachSGC-12%   ThalassaTHAL91%
INTU PropertiesINTU-15%   Victoria Oil & GasVOG24%
DebenhamsDEB-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

NameTIDMMkt capPriceFwd NTM PEDYEV/FCFEV/salesGV ratioP/BV3-month momentumNet cash/debt (-)Cheap
CRH CRH£24bn2,690p-2.1%311.10.6--0.8%-€6.5bnEV/S
United Utilities  UU.£6.2bn911p204.3%-7.82.32.2-13%-£7.1bnP/BV,EV/FCF,EV/S
WPP WPP£18bn1,420p114.2%151.50.91.9-15%-£4.7bnP/BV,EV/S
Marston's MARS£715m113p86.6%-2.41.30.8-18%-£1.5bnGV
Ferguson FERG£12bn4,582p152.3%310.80.93.7-7.0%-£1.3bnGV
Bunzl BNZL£7.7bn2,329p211.8%531.2115.8-5.2%-£1.2bnEV/S
Jardine Lloyd Thompson  JLT£2.5bn1,180p182.8%262.20.87.40.9%-£441mEV/FCF,EV/S
Royal Mail RMG£4.0bn398p105.8%140.43.10.8-7.5%-£358mGV,EV/S
Keller  KLR£596m829p93.5%360.50.71.4-3.6%-£297mP/BV,DY
F&C Commercial Property Trust FCPT£1.2bn150p-4.0%66226.71.13.0%-£223mP/BV
Tritax Big Box REIT BBOX£2.0bn144p214.4%73233.21.1-1.9%-£206mGV
NEX  NXG£2.6bn675p235.7%----4.3%-£191mP/BV,DY
Picton Property Income PCTN£462m86p213.9%3612-1.0-0.9%-£173mGV
Fenner FENR£663m342p191.0%211.30.62.19.3%-£145mGV,EV/S
Standard Life Inv Property Inc Trst SLI£356m91p-5.2%-153.41.12.6%-£115mGV
Grafton  GFTU£1.9bn795p151.7%290.81.91.82.3%-£96mGV
F&C UK Real Estate Investments FCRE£257m107p214.7%3418-1.11.9%-£93mGV,EV/S
Cape CIU£317m263p81.0%6.60.4-2.66.0%-£75mEV/S
Forterra FORT£553m277p112.5%142.01.05.84.8%-£69mEV/S
Custodian REIT CREI£408m115p135.5%46175.31.11.8%-£58mGV
Redrow RDW£2.2bn604p92.0%1081.50.52.06.8%-£56mGV
Huntsworth HNT£245m75p132.4%301.50.41.649%-£27mGV,EV/S
Robert Walters RWA£369m516p161.7%150.30.73.416%£18mP/BV,EV/S
F&C Private Equity Trust FPEO£237m321p-3.9%-3.81.0--11%£32mP/BV,GV,EV/FCF,EV/S
Headlam  HEAD£508m601p153.9%130.61.42.6-7.3%£50mP/BV,DY
Page PAGE£1.5bn488p182.5%251.11.15.62.6%£89mDY
Brewin Dolphin  BRW£972m354p173.8%152.80.8-5.6%£154mEV/S
3i  III£9.1bn950p101.7%9.05.4--14%£356mGV,DY,EV/S
Kingfisher KGF£6.5bn299p123.5%200.52.21.0-11%£597mP/BV
Royal Dutch Shell RDSB£192bn2,167p-6.7%260.90.8--0.2%-$66bnP/BV
Glencore GLEN£50bn353p141.5%110.40.81.421%-$28bnGV
Rio Tinto RIO£65bn3,615p124.9%9.82.00.92.015%-$7.3bnGV
Anglo American AAL£19bn1,324p92.8%8.11.13.31.122%-$5.5bnGV,DY,EV/FCF
Petrofac PFC£1.5bn440p612.1%-0.30.51.7-29%-$1.2bnGV,EV/S
Antofagasta ANTO£10bn996p232.0%232.80.61.824%-$860mGV,DY,EV/S
Petropavlovsk POG£216m7p--10721.3-0.5-13%-$599mP/BV,DY,EV/S
4imprint  FOUR£479m1,709p212.4%150.82.322-1.6%$33mEV/S
Fresnillo FRES£12bn1,564p281.6%405.70.65.3-1.0%$86mP/BV,DY
Anglo-Eastern Plantations AEP£329m830p70.4%121.1191.14.4%$92mP/BV,DY
Spirent Communications SPT£600m98p183.0%111.11.32.3-22%$110mDY
Lamprell LAM£338m99p--1.50.20.10.8-4.4%$268mGV,DY
Randgold Resources RRS£7.1bn7,565p271.0%195.21.02.66.2%$570mEV/FCF

 

FTSE All-Small

NameTIDMMkt capPriceFwd NTM PEDYEV/FCFEV/salesGV ratioP/BV3-month momentumNet cash/debt (-)Cheap
4imprint  FOUR£479m1,709p212.4%150.82.322-1.6%$33mEV/S
Axa Property TrustAPT£14m60p--1.11.3-0.93.7%£10mP/BV,EV/FCF
Cape CIU£317m263p81.0%6.60.4-2.66.0%-£75mEV/FCF,EV/S
Centaur Media CAU£78m54p165.6%141.2-1.28.0%-£10mDY
Creightons CRL£19m31p-0.7%190.6152.247%£2mEV/S
Custodian REIT CREI£408m115p135.5%46175.31.11.8%-£58mDY
F&C UK High Income Trust FHI£124m104p-4.5%9.35.01.2--2.3%-£5mDY
F&C UK Real Estate InvestmentsFCRE£257m107p214.7%3418-1.11.9%-£93mDY
Fenner FENR£663m342p191.0%211.30.62.19.3%-£145mGV
Haynes Publishing HYNS£26m175p204.3%7.00.90.71.17.0%£1mGV,EV/FCF,EV/S
Headlam  HEAD£508m601p153.9%130.61.42.6-7.3%£50mEV/S
Huntsworth HNT£245m75p132.4%301.50.41.649%-£27mGV
Keller  KLR£596m829p93.5%360.50.71.4-3.6%-£297mGVEV/S
Lamprell LAM£338m99p--1.50.20.10.8-4.4%$268mP/BV,GV,EV/FCF,EV/S
Petropavlovsk POG£216m7p--10721.3-0.5-13%-$599mP/BV
Robert Walters RWA£369m516p161.7%150.30.73.416%£18mGV,EV/S
Standard Life Investments Property Income TrustSLI£356m91p-5.2%-153.41.12.6%-£115mDY

 

FTSE Aim All-Share

NameTIDMMkt capPriceFwd NTM PEDYEV/FCFEV/salesGV ratioP/BV3-month momentumNet cash/debt (-)Cheap
Andrews Sykes  ASY£235m555p-4.3%223.33.24.99.4%£18mDY
Anglo Asian Mining AAZ£29m25p7-6.00.7-0.446%-$35mP/BV,EV/FCF,EV/S
Avingtrans AVG£45m236p2621.4%1.60.8-1.3-1.3%£28mEV/FCF,EV/S
Bilby BILB£24m61p72.9%5.20.40.91.8-22%-£4mEV/FCF,EV/S
Billington  BILN£30m253p104.0%6.90.40.61.61.0%£4mGV,DY,EV/FCF,EV/S
Cambria Automobiles CAMB£59m59p71.6%130.10.81.3-20%£3mEV/S
Dillistone  DSG£10m53p597.9%9.40.9-1.5-40%£1mDY
Filtronic FTC£27m13p11-170.72.22.5-4.6%£3mEV/S
Frenkel Topping  FEN£41m54p142.2%575.00.5--19%£5mGV
GETECH  GTC£10m26p---1.0-0.8-27%£2mP/BV
Goldplat GDP£9m6p---0.5-0.5-17%£0mP/BV,EV/S
Griffin Mining GFM£105m62p6-6.21.30.1-17%-$24mGV,EV/FCF
Highland Gold Mining HGM£476m146p127.1%122.11.10.8-2.2%-$205mP/BV,DY
IG Design  IGR£239m379p191.2%140.81.32.815%£3mEV/S
Impax Asset Management  IPX£118m107p-2.1%123.50.5-5.9%£29mGV
M.P. Evans  MPE£409m743p322.0%-4.50.41.65.7%$61mGV
Paragon Entertainment PEL£7m4p8-5.80.4-2.0-3.1%£1mEV/FCF,EV/S
Parity  PTY£10m10p8-100.20.61.6-16%-£4mGV,EV/S
Prime People PRP£12m102p-4.9%9.60.41.10.85.7%£2mP/BV,DY,EV/S
Real Estate Investors RLE£106m57p174.6%46141.30.9-5.8%-£78mDY
Rotala ROL£29m61p103.9%-1.01.20.9-1.6%-£26mDY
Sylvania Platinum SLP£34m12p9-3.90.4-0.410%$16mP/BV,EV/FCF,EV/S
TF & JH Braime  BMT£12m843p-1.1%3390.5111.20.0%-£2mEV/S
Taptica InternationalTAP£235m383p130.9%171.70.45.625%$21mGV
TechFinancialsTECH£5m7p-----0.7-7.1%$7mP/BV
Trans-Siberian Gold TSG£39m36p--7.80.9-0.6-2.7%-$4mP/BV
Volga Gas VGAS£47m58p-1.0%4.31.217.20.9-1.7%$16mEV/FCF
Volvere VLE£29m715p--7.70.4--5.9%£16mEV/S
WYG WYG£65m93p71.9%-0.42.62.1-7.5%-£2mEV/S
Zoltav ResourcesZOL£21m15p--2.00.0-0.2-41%-RUB1.6bnP/BV,EV/FCF,EV/S

Source: S&P Capital IQ