Interesting value criteria column. Any reactions or comments would be appreciated. Anybody follow this approach or something similar? (I sometimes do, albeit haphazardly, but don't assign points.)
- Kris
Snip:
Piotroski's solution wasn't rocket science. He figured that the companies with the best prospects might show some early signs of a turnaround. So he devised a nine-point rating scale based on balance sheet analysis. First there's profitability, which can earn a company up to four points: one point for positive return on assets (a hurdle that eliminates almost half of all value stocks), one for positive cash flow, one if return on assets improved during the past year and one if cash flow exceeds reported income (a measure of earnings strength). Then comes capital structure, three points: one if the ratio of long-term debt to total assets declined over the past year, one if the current ratio (current assets divided by current liabilities) improved and one if the company didn't issue any more common stock. Finally, there are two points for operating efficiency: one if gross margins improved over the past year and another if asset turnover (revenue divided by total assets, a measure of productivity) improved.
There's nothing magic here. Piotroski, who teaches balance sheet analysis, just wanted to see if a few elementary accounting yardsticks would make value investing more profitable. His results, published in the Journal of Accounting Research, are compelling: The higher a value stock scores on Piotroski's nine-point scale, the better it performs. Most important for investors, one-year returns at companies with his top ratings (eights and nines) beat the market by an average of 13 percentage points annually. As indicated earlier, my numbers were even better when I tried Piotroski's approach last year.
The whole column is at biz.yahoo.com |
