Diamonds in the dirt: five Piotroski value stocks to watch?

Friday, Oct 21 2011 by
Diamonds in the dirt five Piotroski value stocks to watch

London-listed stocks have enjoyed mixed fortunes in 2011, with a bright start quickly unravelling over the summer as macro economic concerns damaged investor sentiment. With the FTSE 100 and FTSE AIM 100 both down substantially on where they were one year ago, investors seeking to find bargains face challenging questions. On the one hand, market declines are presenting apparently attractive opportunities to buy equities cheaply but on the other, in the light of the precarious economy, the task of selecting which stocks offer the best chance of gains over the medium term is all the more demanding.

For followers of Joseph Piotroski, a celebrated accounting professor at the Stanford Graduate School of Business, the conditions merit the use of a formula that has frequently helped investors identify opportunities in tough markets. Piotroski is behind the F-Score, a simple indicator to highlight stocks showing the most likely prospects for outperformance amongst a basket of apparently undervalued companies. He first outlined his theory in an April 2000 paper entitled “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.” Since then, it has won an army of followers and in the bear market of 2008, was hailed by the American Association of Individual Investors as the only one of 56 screening tools to produce a positive return for investors.

Piotroski’s starting point is a list of companies that are, on paper, the most undervalued on the market. You arrive at a list of “value” stocks by dividing what the market is pricing them at by what each company’s total assets are stated to be worth and concentrating on the cheapest 20% of companies. This price-to-book value list generally produces a collection of companies that, on a pure valuation basis, can appear to be mispriced. A quick scan of such a list will show that there may be very good reasons why investors won’t touch companies in this basket – they can often be financially stricken or even basket-cases.

The overarching question is however why each company is being undervalued and whether it is justified. It could be any number of factors including serial underperformance, financial calamity, investor ignorance, poor communications, an unsexy sector or an unappealing business model. Whatever it may be, these companies are out of favour and Piotroski’s theory seeks to pick the ones that offer the best chance of recovery…

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IG Design Group plc, formerly International Greetings plc, is engaged in the design, manufacture and distribution of gift packaging and greetings; stationery and creative play products, and design-led giftware. The Company's geographic segments include UK and Asia; Europe; USA, and Australia. The Company sells its products in over 150,000 stores across approximately 80 countries. It also offers a portfolio of licensed and customer bespoke products suitable for sale through multi channel distribution. The Company's products include crackers, pens and pencils, stickers, single cards and gift wrap. The Company offers its products under the brands A Star, B Stationery, Papercraft and Pepperpot. Its subsidiaries include Artwrap Pty Ltd, International Greetings UK Ltd, International Greetings USA, Inc, International Greetings Asia Ltd, The Huizhou Gift International Greetings Company Limited, Hoomark BV, Anchor International BV and Hoomark S.p.z.o.o. more »

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Persimmon Plc is a United Kingdom-based holding company. The Company is engaged in house building within the United Kingdom. The Company trades under the brand names of Persimmon Homes, Charles Church, Westbury Partnerships and Space4. The Company offers a range of homes from studio apartments to family homes in approximately 400 locations under Persimmon Homes brand. The Company builds homes under Charles Church brand in a range of locations. The Company focuses on affordable social housing and sells these homes under Westbury Partnerships. The Space4 business operates an off-site manufacturing plant producing timber frames, insulated wall panels and roof cassettes as a fabric first solution to the construction of new homes. more »

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Inland Homes plc is a United Kingdom-based company, which is principally engaged in acquiring residential and mixed-use sites and seeks planning consent for development. The Company develops a number of the plots for private sale and sells consented plots to house builders. The Company's segments include Land, House Building, Contracting, Hotel, Investments, Investment property and others. The Company is a developer of urban regeneration projects around Southern England, with a particular emphasis on residentially led mixed-use schemes on brownfield sites. The Company's land portfolio consists of approximately 6,680 plots with the majority in the South and South East of England. The Company's portfolio consists of both brownfield and strategic sites. The Company's projects include Wilton Park, Beaconsfield, Meridian Waterside Southampton and Buckinghamshire. The Company's land portfolio includes Famborough, Woolwich and Bushey. more »

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  Is LON:IGR fundamentally strong or weak? Find out More »

4 Comments on this Article show/hide all

Steven Dotsch 21st Oct '11 1 of 4

Piotroski's F-score formula is simple and doesn’t require any difficult maths, but produces an elegant analysis that can also be customised to fit the risk tolerance of individual investors. 

Book: Guide to Dividend Investing
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sohan rahi 21st Oct '11 2 of 4

Very good and usefull information for future .

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Tykethat 21st Oct '11 3 of 4

If this works.......and I'm not saying it doesn't ..... but why has nobody launched a fund / IT / ETF based on this system?

Or have they?

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Steven Dotsch 21st Oct '11 4 of 4

Hi Tykethat

I am not aware of any funds/ETFs in the UK using solely the F-score methodology. Then again there may well be one or more.

Here at Dividend Income, as part of our fundamental investment research. we use a number of fundamental screens in order to ascertain financial strength, including the one designed by Professor Piotroski.

Book: Guide to Dividend Investing
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