When professional investors need to test the financial strength of cheap shares, this is how they do it…

Every investor loves the idea of buying bargain shares but very few of us can stomach the risks of seeing our money trapped or even wiped out by companies that fail to revive their fortunes.

But those in the know have discovered the writings of an obscure US academic who invented a checklist to separate the wheat from the chaff.

As we shall see, applying this checklist has allowed top City brokers and hedge funds to reap astonishing profits, and now there’s a way that you can too…

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The Piotroski F-Score is “the secret sauce” behind the trading strategies of top investors

Generations of investors have endeavoured – and often failed – to stack the odds of beating the market in their favour. Searching out attractively valued shares with the potential to deliver stellar returns comes with big risks – but there is a way to find good quality hidden gems…

Professor Joseph D. Piotroski published a seminal paper in 2000 titled "Value Investing: The Use of historical financial statement information to separate winners from losers" in which he detailed how to build a financial checklist to find stock market winners. At the time most investors hadn’t even heard of Piotroski let alone begun to act on his advice, but over a decade later the proof that his is a strategy to beat all others is mounting….

• Piotroski’s own backtests over 20 years showed that his formula could improve the returns from average value investing strategies by at least 7.5% annually. In addition, buying the top stocks in the market and shorting those that performed badly against his checklist resulted in 23% annualised gains.
• Research by blue chip investment bank Societe Generale showed that large cap stocks scoring 9/9 on Piotroski’s checklist returned over 15% annualised since 1985 beating the market in 4 out of every 5 years!
• The American Association of Individual Investors tracked the ‘classic’ Piotroski strategy for over a decade. It was the only strategy to post positive returns in bear markets returning an average annualised 24.9% over a decade versus a 2.6% return for the S&P 500.

So if professional investors in banks like Morgan Stanley and Societe Generale consider the F-Score to be a vital tool for their clients to assess shares – shouldn’t you be using it too ?

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Nine points to give you the edge over other investors

Professor Piotroski’s ground-breaking research focused primarily on the cheapest 20pc of shares in the market in order to hunt for big winning turnarounds. But with odds of less than a coin toss for picking a cheap stock that will rise in value, Piotroski wondered how he could stack things further in his favour.

What he discovered was that most investors focus on the wrong things – the ‘story’ or analyst forecasts – while ignoring the financial clues in a company’s accounts that may hold the key to a turnaround.

So he created a nine-point checklist that’s best described as a financial obstacle course that only the best shares survive.

The checks look for companies where profits and cash flow are growing and canny management teams aren’t pulling any accounting tricks.

They also look for signs that a company is doing better at making money from its assets, cutting debt and not having to issue new shares.

With each check scoring one point each, the closer a stock gets to scoring a full nine points, the more faith an investor can have in its financial strength and its track record for improving.

Of course finding the shares that score nine out of nine on Piotroski's checklist would take forever if you had to figure out all these tests one by one for every company you wanted to analyse... but now you don't need to!

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How you can put Piotroski’s findings to work on your portfolio

At Stockopedia.com we are building a complete investment research service, dedicated to providing the highest quality data and tools for investors through an easy to use web application. Built from the ground up by a team led by ex investment bankers Ed Page Croft and Dave Brickell who are determined to democratise the best investment strategies on the planet.

With Thomson Reuters, the leading institutional data provider, as Stockopedia's data supplier this level of data quality and analytical tools has never before been available to the private investor.

We’ve built the tools to help you find the dozens of high F-Scoring stocks in the markets:

And our Piotroski features are just a fraction of the market beating resources available on Stockopedia. Why not take a free trial and check out all the we can offer. It could be one of the most profitable investments that you ever make!

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