Can anyone explain to me how to understand when a stock with a healthy Pitroski F Score also has a poor bankruptcy risk Altman Z score? Which score do you learn to?
I would say that it is important to recognise that the two scores measure significantly different things.
Piotroski F-Score (Fundamental Health Trend)
Measures : the trend in a company's accounts and its overall financial health.
Predictive Claim : Companies with a score of 8 or 9 have been found as a group to outperform weak stocks by 7.5% annually over a 20 year period.
Altzman Z-Score (Bankruptcy Risk Meter)
Measures : how likely a company is to head into serious financial difficulty within the next two years.
Predictive Claim : Tests have shown that the Distress Zone (score of less than 1.8) is 80-90% accurate in predicting bankruptcy. (presumably in that two year horizon)
There is one area of commonality though in that stocks with an F-Score of 2 or below were found by Piotroski to be five times more likely to fall into financial problems.
So a low score on both measures is clearly a red flag; the current cicrumstances indicate a bankruptcy risk and things are getting worse.
However, the circumstances you refer to (high F score, Low Z score) describe a company that currently is at risk of bankruptcy, but has a business that is improving.
Subjectively, this would suggest to me a company with a better chance (than it's low Z-score peers) of trading through it's parlous finances and/or with a greater ability to raise fresh capital from the market should they need extra cash to continuing trading through to a healthier position.
I should stress though , that I have not seen any statistical study of the performance of this kind of stock, so I would not want to rely on these figures in isolation. Rather, I would want to understand (in particular) what gives rise to the low Z-score together with a more granular review of the likely and worst-case cashflows to get a better view of the likelihood of survival and also any early warning signs of distress manifesting itself.
I would also note that both measures are essentially "health measures" and do not really relate to the market valuation placed on the company. A stock with a risky Z-score might still be a decent investment (as part of a heavily diversified portfolio) if the price is likely to increase 10-fold in the event that it survives; equally a stock scoring well on both measures could still be a poor investment if it is substantially overvalued with an over-optimistic/complacent view being taken on future prospects.
It would be interesting though to see if there is any statistical data to give an indication of the probabilities associated with this combination of measures.
It is not actually such an uncommon combination, a screen in the UK market for stocks with a very high F-score of 7,8 or 9 and Z-scores of less than 1.8 shows 49 current qualifiers, including perhaps most notably GlaxoSmithKline (LON:GSK) , Vodafone (LON:VOD) and Shire (LON:SHP) together with other "household names".
