What The Little-Known "F-Score" Reveals...
By Jimmy Butts | November 20, 2018 |

Benjamin Graham, Warren Buffett, Peter Lynch, and George Soros. I would guess that there are at least one or two names on this list that the average Joe would recognize. These moguls are fixtures in the investment world. And for good reason, these notorious investors have amassed a tremendous amount of wealth through investing.


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However, keep in mind that there are hundreds, if not thousands, of folks who have made their mark in the investment world. And while some of these under-the-radar investors may not have the name recognition as Warren Buffett or George Soros, their contributions to the field are just as important.

Take Joesph Piotroski, for example. He earned an MBA in Finance from Indiana University and a Ph.D. in accounting from the University of Michigan. He's an accounting professor at Stanford University, holds a plethora of awards and honors and has written numerous articles and working papers.

But perhaps his most notable work comes from a 2002 paper entitled "Value Investing: The Use of Historical Financial Statement Information to Separate Winners and Losers." In this paper, Piotroski backtested a value- and accounting-based stock-selection method that produced a 23% average annual return from 1976 through 1996 -- more than double the S&P 500's return during the same period.

Piotroski's work starts with low price-to-book value stocks. Price-to-book value was a favorite measure of Benjamin Graham and his disciples, including Warren Buffett. Piotroski then used a variety of other accounting standards and financial metrics in his backtest, including profitability, leverage and liquidity, and operating efficiency.

He then developed a scoring methodology of between 0-9 to identify stocks with solid and improving financials. Piotroski found that the higher the financial score, the greater the average portfolio return. Today, this is known as the Piotroski F-Score.

Let's Use The Piotroski F-Score To Screen For Stock Picks
I recently did an equity screen utilizing Piotroski F-Score model to see which stocks today would meet his criteria.

As I've noted with previous screens I've shared with you, the stock selection below is a good starting point for further research. As with any quantitative tool, it should not be used in isolation.

With that said, here are the results from my Piotroski F-Score screen:

As you can see, only 17 stocks (out of 9,000) had an F-Score of 8 or 9, with just two showing the highest F-Score of 9. The two stocks with F-Scores of 9 would be my starting point for further research.

The first stock with an F-Score of 9 is holding company Live Ventures (Nasdaq: LIVE). This company acquires and operates profitable companies in various industries. Currently its three main business segments are manufacturing, retail and online, and services.

This micro-cap stock ($14 million market capitalization) has generated sales of $187 million in the last 12 months, and nearly $7 million in profit. Its financial metrics are some of the lowest in the industry with a P/E of only 3, price-to-sales of 0.08, and a price-to-book of 0.36.

Be warned that this is a lightly traded stock (average daily volume of only 13,500 shares), which means you'll see a larger bid/ask spread and it could be tougher to get into -- and out of -- the stock at the price you want.

The other stock that scores a perfect 9 is publishing firm Gannett (NYSE: GCI). You might be familiar with the firm's popular USA Today Network, which consists of news outlet USA Today as well as 109 local media organizations in 34 states and Guam. It also owns ReachLocal, which is a digital marketing solutions company.

In the last 12 months, the company generated more than $3 billion in revenue, and net income of $15.7 million. From a valuation perspective, Gannett trades at only eight times earnings, which is well below the industry average of 24. It also trades at a price-to-book ratio of just 0.97, which is also well below the industry average of 2.2.

The company is competitive when it comes to operating efficiency and profit margins -- two key contributors in the stock's F-Score. With its low P/B ratio and robust margins and operating efficiency we can see why the stock scores a 9 -- the best ranking in Piotroski's F-Score model.


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The Takeaway
As I mentioned earlier, this screen should not be used in isolation -- I wouldn't just buy a stock off of this list just because it passed the criteria.

That said, it will be interesting to see how Piotroski's F-Score model fares in the current environment. And Gannett looks like the kind of stock my Top Stock Advisor subscribers and I might be interested in adding to our portfolio.

I'll revisit the performance of these stocks in the months ahead. But in order to gain access to my top picks, you'll have to be a member of Top Stock Advisor. To learn more about the perks of being a member, go here.

This article originally appeared on StreetAuthority.com.

 

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