Finding Value With The Piotroski F-Score

The following is part of a series originally published at the end of November on SeekingAlpha. The series was designed to test the effectiveness of the Piotroski F-Score in today’s market. The F-Score was designed to help investors outperform the market, but if it was really that good, surely everyone would be using it? The stocks below were selected using computer screens, no human interaction was involved, the stocks that qualified for the F-Score screen, entered the test portfolio.

I’ve always believed that computers are, and will always be, terrible at stock picking, and a human with experience is needed to pick out the ‘duds’ as it were from the results given by the computer….there’s also a need to double-check the computer data.

So the article was essentially an experiment, not a very scientific one granted, but an experiment nonetheless.

I will be updating on a monthly basis.

Finding Value With The Piotroski F-Score

First published on 20/11/2014

This is the first in what will be a series of articles looking at the investment performance of the Piotroski F-Score.

Finding value

In the world of value investing, there are many ways to hunt for value opportunities. However, few are as well defined as the Piotroski F-Score, which aims to identify the healthiest companies amongst a basket of value stocks through applying a set of nine accounting-based stock selection criteria.

The F-Score was designed to hunt out value opportunities that are profit-making, have improving margins, don’t employ any accounting tricks and have strengthening balance sheets. However, as usual, this strategy cannot be employed alone, it needs to be combined with another screening tool to produce a suitable set of results. One point is awarded for each criteria the company passes and the stocks that score the highest, eight, or nine are regarded as being the strongest candidates for recovery.

Piotroski recommended scoring the bottom 20% of the market in terms of price to book value and then working from there. Using the following system, Piotroski’s April 2000 paper Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers, demonstrated that the Piotroski score method would have seen a 23% annual return between 1976 and 1996 if the expected winners were bought and expected losers shorted. According to the American Association of Individual Investors, year to date the F-score screening criteria with a low P/B value would have returned 3.4%. Over the past five years this return would have been 33.9% and the ten-year return was 26.7%.

The screen

Throughout this series I’m testing the F-Score, as both a way to discover value stocks and trade them without fundamental analysis, the screening criteria and invests are based purely on the financials in an attempt to remove any emotional bias — something that holds back investment performance.

The F-Score screening criteria are as follows:

Profitability Signals

1. Net Income – Score 1 if there is positive net income in the current year.

2. Operating Cash Flow – Score 1 if there is positive cashflow from operations in the current year.

3. Return on Assets – Score 1 if the ROA is higher in the current period compared to the previous year.

4. Quality of Earnings – Score 1 if the cash flow from operations exceeds net income before extraordinary items.

Leverage, Liquidity and Source of Funds

5. Decrease in Leverage – Score 1 if there is a lower ratio of long term debt to in the current period compared value in the previous year.

6. Increase in Liquidity – Score 1 if there is a higher current ratio this year compared to the previous year.

7. Absence of Dilution – Score 1 if the Firm did not issue new shares/equity in the preceding year.

Operating Efficiency

8. Gross Margin – Score 1 if there is a higher gross margin compared to the previous year.

9. Asset Turnover – Score 1 if there is a higher asset turnover ratio year on year (as a measure of productivity).

And 20 companies that qualify in the current environment are as follows:

Ticker Company 1 2 3 4 5 6 7 8 9 F-Score Price to book
1 (NYSE:NE) Noble 1 1 1 1 1 1 1 1 1 9 0.7
2 (NYSE:TX) Ternium SA 1 1 1 1 0 1 1 1 1 8 0.8
3 (NYSE:UNT) Unit 1 1 1 1 1 0 1 1 1 8 0.9
4 (NASDAQ:ORIG) Ocean Rig 1 1 1 1 0 1 1 1 1 8 0.6
5 (NYSE:CYS) CYS Investments 1 1 1 1 1 0 1 1 1 8 0.8
6 (NYSE:PACD) Pacific Drilling 1 1 1 1 1 0 1 1 1 8 0.6
7 (NYSE:HOS) Hornbeck Offshore Services Inc 1 1 1 1 1 1 1 0 1 8 0.8
8 (NYSE:OMG) OM Inc. 1 1 1 1 1 1 1 1 0 8 0.8
9 (NYSE:TRK) Speedy Motorsports 1 1 1 1 1 1 1 0 1 8 1
10 (NYSE:GLF) Gulfmark Offshore Inc 1 1 1 1 1 0 1 1 1 8 0.7
11 (NASDAQ:SCHN) Schnitzer Steel Industries Inc 1 1 1 1 0 0 1 1 1 7 0.8
12 (NYSE:BBG) Bill Barrett 0 1 1 1 1 1 1 1 1 8 0.7
13 (NYSE:PVA) Penn Virginia 1 1 1 1 1 1 0 1 1 8 0.6
14 (OTCQB:SXCL) Steel Excel Inc 1 1 1 1 1 0 1 1 1 8 0.8
15 (NYSE:MNI) McClatchy Co 1 1 1 1 0 1 1 1 1 8 0.9
16 (NYSE:DCO) Ducommun Inc 1 1 1 0 1 1 1 1 1 8 1
17 (NYSEMKT:VTG) Vantage Drilling Co 1 1 1 1 1 1 1 1 1 9 0.5
18 (NYSE:NES) Nuverra Environmental 0 1 1 1 1 1 1 1 1 8 0.5
19 (NASDAQ:WLFC) Willis Lease Finance 1 1 1 1 1 0 1 1 1 8 0.8
20 (NYSE:EARN) Ellington Residential Mortgage 1 1 1 1 1 0 1 1 1 8 1

P/B figures rounded to the nearest whole number.

To assess the F-Score I’m starting a hypothetical portfolio with a $1,000 investment in each company. Holdings will be sold when the P/B value exceeds 1.1. Investment prices are based on the closing price on 11/18/2014. These positions are based on financial data only, there’s no weighting to fundamental factors. I’ve decided to use this method in an attempt to take all of the emotion out of the trading and running of the portfolio, only when a stock qualifies under the set criteria will it be brought and it will be sold on the same basis.

A quick run through of the qualifying companies.


Even though Noble has been hit by an offshore drilling industry slowdown over the past few months the company’s low P/B and solid balance sheet helps it to qualify.


Latin American steel producer, Ternium qualifies for every criteria apart from leverage. The company’s debt has increased this year, although a debt to equity ratio of 0.4 for a steel producer is hardly worrying.


Is a oil and natural gas contract drilling company and passes ever criteria apart from number six, an improving current ratio. The company’s current ratio currently stands at 0.6 according to Finviz.

Ocean Rig

Contract driller Ocean Rig is facing the same pressures as Noble. The company is currently trading below book and passes all of the F-Scores criteria apart from decreasing long-term debt. The company is still building up its fleet so long-term debt continues to rise.


Specialty finance company CYS invests in residential mortgage pass-through certificates in the United States. It also focuses on investing in residential mortgage-backed securities. The company passes all criteria apart from an improving current ratio.

Pacific Drilling

Pacific is yet another offshore driller that fits the F-Score bill. The company passes all of the criteria apart from the improving current ratio, which currently stands at 0.8.

Hornbeck Offshore Services

Hornbeck is not another driller but a supplier of offshore supply vessels and multi-purpose support vessels. Trading at a P/B of 0.8 the company passes eight of the nine F-Score criteria. The company falls criteria number eight as it gross margin is contracting.

OM Inc.

Operates as a specialty chemicals company producing chemicals for technology-driven industrial applications. The company passes all of the F-Score criteria but falls down on asset turnover, a measure of productivity. It seems as if the company is becoming less productive.

Speedy Motorsports

Speedy is one of the most expensive companies in the group trading at a P/B of 0.96. The company passes eight of the nine F-Score criteria falling down on number eight as the company’s gross margin is contracting.

Gulfmark Offshore Inc

Gulfmark is yet another provider of offshore marine support and transportation services. The company, like many of its peers in the sector trades at a low P/E of 0.7 and passes eight of the nine F-Score criteria. The company falls down on criteria number six, as its current ratio has not improved over the past year. That being said, at present the company has a current ratio of 2.5 so there’s nothing to worry about.

Schnitzer Steel Industries Inc

Schnitzer is the lowest scoring of the group, passing only seven of the nine F-Score criteria. The company has both, a rising level of long-term debt and a deteriorating current ratio. According to FinViz the company currently has a current ratio of 2.6 and a debt to equity ratio of 0.4.

Bill Barrett

Bill Barrett is an independent energy company, so the stock has fallen in line with the rest of the oil & gas sector. Still, as a recovery play on the sector the group appears to be well placed, it passes eight of the seven criteria and trades at a P/B of 0.7. Unfortunately, the criteria where Bill falls down is criteria number one: Score 1 if there is positive net income in the current year.

Penn Virginia

Penn is another independent energy producer. The company passes eight of the nine criteria falling at number seven: Absence of Dilution – Score 1 if the Firm did not issue new shares/equity in the preceding year. This could be a warning to potential investors that further dilution is down the line.

McClatchy Co

McClatchy publishes newspapers and related digital and direct marketing products in the United States. The company passes all criteria apart from criteria number five, as group debt is rising, not falling. Still, with a P/B of 0.9 and an F-Score of eight the company looks to be an interesting turnaround bet.

Ducommun Inc

Ducommun provides engineering and manufacturing products and services primarily to the aerospace, defense, industrial, natural resources, medical, and other industries. With a P/B of 1, the company is slightly expensive at present levels but it still trades below my P/B benchmark of 1.1. The company passes eight of the nine F-Score criteria, falling at number four, quality of earnings.


Vantage is facing similar pressure to Noble but the company’s improving balance sheet and cash generative operations are helping it recover quickly.

Nuverra Environmental

Nuverra provides full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations. The company is still loss making so only passes eight of the nine F-Score criteria, falling at the first hurdle. Nuverra trades at a P/B of 0.5.

Willis Lease Finance

Willis Lease Finance Corporation is engaged in leasing commercial aircraft engines and equipment worldwide. The company passes eight of the nine F-Score criteria, apart from number six, an improving current ratio.

Ellington Residential Mortgage

Ellington Residential Mortgage REIT, a real estate investment trust, which focuses on investing in residential mortgage-backed securities. The company passes all criteria apart from an improving current ratio.

The Superinvestors of Graham-and-Doddsville: Charlie Munger

Table 5 is the record of a friend of mine who is a Harvard Law Graduate, who set up a major law firm. I ran into him in about 1960 and told him that law was a fine hobby but he could do better…”– Warren Buffett’s introduction to Charlie Munger in his essay: The Superinvestors of Graham-and-Doddsville.

This is the fourth part of a six part series on Warren Buffett’s essay, The Superinvestors of Graham-and-Doddsville. Click to read the earlier articles on Walter SchlossTweedy, Browne and Bill Ruane.

Buffett’s essay was a homage to the value investing philosophy of Benjamin Graham. It referenced seven of Graham’s former employees who went on to become some of the greatest investors of all time. Fourth on the list is a man that later became Buffett’s number two at Berkshire: Charlie Munger.

Charlie Munger: Starting out

Charlie Munger originally started out as a lawyer, before being (in the words of Warren Buffett) convinced that there was much more money to be made in managing other people’s money. Charlie started his own investment partnership in 1962, after meeting Buffett in 1959.

Of all the ‘Superinvestors’, Munger is probably the most influential. He’s widely credited as the man who helped change Buffett’s strategy from a deep value, cigar butt approach, to a quality and value approach, helping Buffett to get to where he is today. Munger also favoured a highly concentrated portfolio — three to four large holdings of quality companies — rather than a well-diversified portfolio of 15 to 20 stocks. This approach worked extremely well, although it did make his record much more volatile.

– See more at:

The Superinvestors of Graham-and-Doddsville: Bill Ruane

The Sequoia Fund

At the time of winding down his early investment partnerships, Buffett asked his friend Bill Ruane to set up the Sequoia Fund to ensure that the partners would have their money well looked after.

Buffett didn’t just pick Ruane’s name out a hat. He chose him because he was taught by and worked with Ben Graham. And since leaving the Graham-Newman partnership, Ruane’s performance had put many other asset managers to shame.

During its first 14 years of operation — from 1970 to 1984 — The Sequoia Fund outperformed the S&P 500 by an average of 8.2% per annum

Large-cap value

Ruane achieved his impressive returns over the years by using a strategy many investors will be familiar with: taking concentrated positions in good businesses that appeared to be trading at attractive valuations. It’s a strategy similar to the one Buffett uses today.

And here are eight key traits of Ruane’s investment strategy that helped him outperform the market consistently during his time running the Sequoia Fund.

1. First of all, forget the level of the wider market. Nobody knows what the market will do today, tomorrow or two years from now. It’s pointless to try and figure out whether the market will go up or down. The only thing that matters is the specific situation having to do with your stocks. The level of the FTSE 100 is not going to affect the everyday business activities of many companies.

2. Secondly, change your perception of the market. Look at the company as a whole, not as a piece of paper or stock ticker on a screen. If you spend your time concentrating on a company’s stock price, you’re a speculator, not an investor. Invest in the underlying business. You don’t need inside information. You don’t need charts and mumbo jumbo. It isn’t about momentum.

3. Use your own research when deciding whether or not to make an investment. This is only way you can truly get to know a company. If you don’t understand how to assess an investment correctly, find someone to manage your portfolio. Your own research is key in developing the positive convictions required to own and hold concentrated investment positions. After conducting your own, detailed analysis you’re less likely to make a silly mistake that costs you money; like selling too early.

– See more at:

Some Thoughts On ALJ Regional Holdings, Inc.

ALJ Regional Holdings, Inc.

You’ve got here a well managed, cheap co that is moving forward….advantaged by net loss tax credits, paying off debt, looking for additional acquisitions…

Well managed- rapidly paying off debt, which is amortizing at extremely attractive interest rates

Q4 earnings per share were….$0.20..that’s $0.60 annualized no its NOT it’s $.80 However, Faneuil was awarded a new contract at the end of 2014…so that should add a boost. Still, you’re looking at a P/E of 6.5 based on annualized Q4 earnings….

Buying up businesses and keeping the management teams in place…clever….moreover, the management teams of these businesses are being given a share in the companies…so share in the profits and outlooks…even more impressive.

“As of September 30, 2014, ALJ had two employees, its Executive Chairman and its Chief Financial Officer, performing services dedicated primarily to general corporate and administrative matters. As of September 30, 2014, Faneuil had approximately 3,000 employees and Carpets had approximately 200 employees” — ALJ has essentially become a PE company, they’re not really exposed to any risk.

For the twelve months ended September 30, 2014, the Company used $28.9 million in investing activities, primarily attributable to the $19.4 million acquisition of Faneuil, $5.3 million acquisition of Carpets and $4.3 million acquisition of fixed assets

but at the same time, cash generated from operations was $14.4m for the year….strip out the acquisitions and you get a FCF of $10m p.a….carpets is not profitable and Faneuil has a huge contract coming online this year…$10m FCF on a co with 31.3m shares in issue…that’s $0.32 per share a FCF yield of 8.2% but even at this level there’s plenty of room to grow..

Around $15mm net income, on around $48m of net assets, that’s an ROE of 33%—-no tax losses you’re looking at ROE of 20%…

Earnings yield 20%….

[LONG ALJ Regional Holdings, Inc.]

Some Thoughts On Karnalyte Resources Inc

Karnalyte Resources Inc

This is a cigar butt with upcoming catalyst

Trying to develope a potash mine in Canada

Has plenty of resource, a world leading mine, low cost too

Company is working to achieve financing for the mine, 20% owner, Indian fertilizer company has a $700m loan waiting; company is in discussions
The money is nearly there, just waiting for go ahead

Should have the cash after EGM — in March I believe

There’s an activist too, he’s the largest shareholder pushing for change.

At the end of Sept had CAD$42.9m in cash…CAD$3.3m cash burn per half….lets say CAD$39m, tangiable assets CAD 60m — these numbers are lower than the estiamtes should be…..anyway

with $39m cash, current liabilites $410,000, net nets….well lets say $38m CAD, or….with 27.5m shares in issue….CAD$1.38 net nets, in USD $1.11,

With $60m tangiable assets, ($59m equity) per share tangiable asset value $2.15….USD $1.73

So…based on the US listing ($0.699), the stock is trading at a 37% discount to cash (conservative est. and 59.6% discount to NAV…

Special Value and opportunity ranking with a 12 month time frame.

[No position]

Be Careful What You Short

Shorting on valuation alone is a risky business. Nine times out of ten, the analysis is sound, it’s clear the company in question is overvalued and should be due for a re-rating. However, it’s often difficult to maintain the short position for the required period as there’s no telling how long market exuberance can last.

How successful are short selling campaigns?

A recent article by Alon Bochman of investment firm, Stepwise Capital provides a real insight into how successful different types of short selling campaigns are. The article looked at the different performance of shorts based on valuation, compared to shorts based on suspected fraud. The article uses data from a new research service called Activist Shorts Research, which has compiled data on more than 400 short campaigns from 2002 to present…..see more at

The Superinvestors of Graham-and-Doddsville: Walter Schloss

The Columbia University School of Business is synonymous with value investing. It’s where Benjamin Graham, the father of value investing taught and developed the style of investing we now know as deep-value investing during the 1920s.

In 1984, in honour of the 50th anniversary of the publication of Benjamin Graham and David Dodd’s book, Security Analysis, the University invited Warren Buffett (undoubtedly Graham’s most successful student) to speak to students. Buffett’s speech became the driving force behind his now famous essay, ‘The Superinvestors of Graham-and-Doddsville‘.

Walter Schloss

One of Buffett’s ‘Superinvestors’ was Walter Schloss, who learned his trade under the stewardship of Benjamin Graham.

Schloss never went to college. In fact, his financial education was limited to an evening class with Graham, which he enrolled on after reading ‘The Intelligent Investor’. Soon after taking the class, Schloss went to work for Graham at the Graham-Newman partnership. He left the partnership during 1955 and the rest, as they say, is history:

“…armed only with a monthly stock guide, a sophisticated style acquired largely from association with me, a sub-lease on a portion of a closet at Tweedy, Browne and a group of partners…Walter strode forth to do battle with the S&P…” — Warren Buffett praising Walter Schloss in a letter to members of the “Buffett Group” before its Hilton Head conference in 1976.

Schloss liked his “cigar-butt” companies and sought to acquire as many companies trading at 1/3 net working capital as possible. Schloss’ screening criteria were:

  • Trading at a discount to book value
  • Trading at a low P/E multiple
  • Been around for more than ten years
  • Had no long-term debt
  • Trading at or near its 52-week low
  • Had a high insider ownership
  • Had a good dividend yield

– See more at: