How the Piotroski F-Score can show the way to higher quality shares

Wednesday, Oct 11 2017 by
How the Piotroski FScore can show the way to higher quality shares

When Warren Buffett said that “time is the friend of the wonderful company, the enemy of the mediocre”, he was stressing his view that company quality is essential in investing. For him, ‘high quality’ is a pointer to firms with strong competitive advantages that can compound returns over long periods. While many will agree with that idea, it’s not always easy to know what really defines quality - and where it can be found in different situations across the market.

One way of tackling that challenge - and to get equipped with a way of assessing quality in any kind of stock - is to take a closer look at the Piotroski F-Score.

A quality checklist for all occasions

The F-Score was introduced in 2000 by an accounting professor called Joseph Piotroski. He’d constructed a checklist of nine accountancy-based questions that a company could either pass or fail. The higher the score, the better. But a key feature of Piotroski’s F-Score is that it looked back to previous financial results for signs of financial improvement or deterioration. So this was very much a way of looking at the fundamental health trend of a company.

Piotroski originally formulated the F-Score as a way of assessing value stocks. By studying financial health trends, he wanted to find out which of the cheapest stocks in the market was best placed to recover. His study showed that this worked very well. Cheap, high F-Score stocks did tend to outperform. But there was more…

In the years afterwards, the F-Score was picked up and put to the test by the research teams of investment banks like Societe Generale and Credit Suisse It was applied to real world investing situations - like this one by Credit Suisse - and was still shown to work well. As a result, the F-Score has been accepted by some of the best regarded investment teams as a useful proxy for quality in almost any situation.

Exploring the F-Score in detail

Digging into the detail, the nine F-Score checks are spread between three main areas of financial analysis. First is profitability, where it examines operating profits and cashflow to make sure the business can sustain itself and even pay dividends. These checks look for an improving trend in profitability, which in underpriced and potentially misunderstood stocks can be a sign that a turnaround is underway.


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24 Comments on this Article show/hide all

pone 11th Oct '17 5 of 24

I would have liked to have seen a few examples of how the score is actually calculated, to get a sense of how it weights these different factors.

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iwright7 12th Oct '17 6 of 24


If you click on the blue "Piotroski F-Score" link in the Health Trend box on the right hand side of a company Stocko page you will get a pop up box containing the 9 component F-Scores. If you then click on the individual blue "Details"  link, you will see the year on year comparison numbers.

One point to note is that the scoring is a binary Yes/No point system, so for example for the 4th question: Is it more profitable than it was last year?  if yes its one point and if no it is nil.   The problem with this simplicity is that a particular company may be coming from a very low profitability base and even a minute improvement vs. last year will still score one point.  

High F-Scores will tend to select improving companies with +ve momentum that will "front run", especially in a bull market. But like other momentum related factors, its worth bearing in mind that back testing has shown that high F-Scores under-preform  in the year following a recession. 

Overall though a high F-Score of 8/9 shows significant company improvement across a wide range of metrics including their cashflow, balance sheet and growth. Mechanically selecting a bucket of high F-Scoring companies removes human bias, although I personally prefer to stock pick and try to take account of known biases.   Trust this helps. Ian  

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iwright7 12th Oct '17 7 of 24

Ben - One other thought. Its clear from the discussion board that there are a lot of new investors, existing investors who are not clear how the Stocko numbers should be interpreted and those who are experienced and want to dig deeper into the Stocko metrics. Its OK looking at the videos, but these tend to cover a huge amount of ground in a very short time period.

I for one would be happy to attend a periodic beginners/intermediate Stockopedia teach in (perhaps in Oxford or London) to go through some of the numbers and guru screens in a lot more depth. I would have thought £100 per half day would be fine and if 20-30 like minded individuals could be assembled then the event would was its face at least.

Are others up for this? Ian

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tony akram 12th Oct '17 8 of 24

Yes good point I agree with Ian any help would be great

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zeibots 14th Oct '17 9 of 24

In reply to post #227753

Great idea, I would also like to meet other Stockopedia subscribers in my area, we already have such a group and we meet on a regular basis. Any more of you in the New Forest area ?

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Mike888 14th Oct '17 10 of 24

A point to note, the snapshot shows companies achieving a F-Score of 9 NOW, these companies have not achieved a 9 score for the entire year, so to take an example :

"eg Solutions" has had an F-score ranging between 5 and 6 for the entire year until October, in October it achieved 9 and as such has appeared on the snapshot. The RS of 135 has been achieved by a company that has in actual fact had an F-score of between 5 & 6 for almost the entire year.

I've only checked a couple, ie, Haynes for example 

I'm not saying that the F-Score is something that shouldn't be used, just be careful its not a guarantee of success. It would be interesting to see how a screen of high F-Scores 12 months ago actually performed.

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David Brightside 14th Oct '17 11 of 24

Excellent article. Would welcome a paid for seminar along lines of iwright7

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iwright7 15th Oct '17 12 of 24

Good to see some support for a paid for seminar/teach in. Are there more of you with a simalar view - If so please so please add your comments, rather than sit on the sidelines.

I was reflecting on the usefulness of the F-Score and reflecting on fact that many of my high scoring companies also have a higher than average Altman Z score. This is not altogether surprising because the Z score measures “distance to bankruptcy” so a high F and high Z should find improving companies that are unlikely to go bust.

With this in mind I constructed a simple High F/Z Stockopedia screen

F Score >7 (8+)
Alt Z Score >3 x market median (circa 9+)
Sort by RS% 3 months (for recent momentum)

Needless to say Taptica International (LON:TAP) is still there.

But some new names have come to light and leading the screen is a £18M micro cap called Octagonal (LON:OCT), which passes no other screens. It’s got a F of 8 and an Z score of  32 together with fantastic return numbers. Not much information available on Octagonal (LON:OCT) but it looks interesting, so I would welcome any insight. It’s a high spread, but intrigued I took a 1% portfolio stake on Friday. Ian

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Rova 15th Oct '17 13 of 24

Extremely enjoyable and insightful. Glad to be onboard.

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gus 1065 15th Oct '17 14 of 24

In reply to post #228863

Hi Ian.

Octagonal (LON:OCT) came up on a couple of my filter screens a few weeks ago based on the decent stock metrics you point out. In the end, I didn't invest. I noted David Lenigas is one of the NEDs - no personal issues for me, but he is a regular bug bear with Tom W. and friends over on ShareProphets. Usually over his association with UK Oil & Gas Investments (LON:UKOG) , although Octagonal (LON:OCT) has also been singled out in the past as "an (AIM) rule breaking dog with fleas" - one of the nicer things they had to say about the company.

I've owned several companies in the past that Tom W. has had a go at. I don't always agree with the analysis (such as it is once you get through the vitriol), but he has his followers and for a small AIM micro cap these can create a headwind that I try and avoid on new acquisitions. Not entirely fair or rational but absent a compelling investment case this has become a rule of thumb for me.

Hope it goes well for you.


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Dickshorty 15th Oct '17 15 of 24

+1 for the seminar / teach in.

Interesting to read about the meet up group, zeibots. Any takers for an East Midlands Group?

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Mike888 15th Oct '17 16 of 24

In reply to post #228908

Yes an East Midlands Group sounds like a great idea

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iwright7 16th Oct '17 17 of 24

In reply to post #228883


Thanks for the further Octagonal (LON:OCT) background. If TW is a headwind then the recent forward positive momentum is particularly good. The F and Z score numbers are impressive, provided the are factual and not fictional. Octagonal (LON:OCT) strikes me as a penny share that will do very well, or blow up. For me its a 1% punt in my otherwise fairly boring Moat type portfolio. Ian

Any more +1's for a central Stocko teach in, or regional get together?  My home area is the West Midlands.

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Ben Hobson 17th Oct '17 18 of 24

In reply to post #227638

Hey - sorry for the delay...

This is a good point. I don't know Haynes inside out, but I've had a look back and the F-Scores have flitted between 6 and 7 and the occasional 5 for the past two years. And in that time the Altman Z has almost always been 1.1 - 1.3, which is technically not good.

It was the recent results in September that pushed the F-Score up to 9. So it's detected an improvement and right now it's as good as it gets against the checklist. But to be fair, Haynes seems to be in transition. It's buying other businesses (using cash and a bit of short term debt), it's selling assets, outsourcing bits and pieces, etc. It would be no surprise if some checklists were impacted by all that when the next results come out. I think one way of reading that '9' in this case is that there is some improvement going on here - something has changed for the better - which begs the question: has it properly recovered from what looked like quite serious trouble in the last couple of years?

On the Z-Score/ F-Score... it's interesting... we have two checklists that seem to say two different things. But I think there's a bit more to it, and in this situation that's actually helpful. On one hand, the F-Score is saying the health trend of the business is improving across the board against its 9 key checks.

But the Z-Score - which looks at the 5 common red flags of future bankruptcy and scores companies against them - doesn't like Haynes on 3 of the 5. At Stockopedia we're trying our absolute hardest to make things as clear as possible. But while this looks like mixed messages, I think these two checklists might be providing a reasonable assessment of a company that is basically in recovery. There are going to be things to like, but also areas of concern or that need work.

I'm fearing after all this that I haven't answered you. I think in these cases there's a balancing act going on and a judgment to make. That aside, High F-Score companies - based on the screen we track - have done quite well (better than the Z-Score short screen!) but I agree that Haynes is not entirely clear (and there'll always be others like it).

Thanks, Ben

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ISAallowance 17th Oct '17 19 of 24

In reply to post #228948

Also E Mids, would try and attend any meet up.

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iwright7 18th Oct '17 20 of 24

In reply to post #229578

Ben - Just run your 9 F-Score screen, adding in an Alt Score:

Alt Z Score >3 - 7/10 left
Alt Z Score >9 - 4/10 left  = TAP, COG, FDM, TFW

I much prefer the look and metrics of the four F9 + Alt Z >9 candidates.  The Highest Alt sort has tended to remove companies with lower Quality scores. I know the Q composite score includes an element of the Alt component, but I suspect not enough to account for this? 

Would be interesting to be able to back test for a High F/Z combination and a High Alt Z long screen as a proxy for high Quality.

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Jeff Hunter 22nd Oct '17 21 of 24

Also east mids and would be interested in a meet up.

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Howard Marx 22nd Oct '17 22 of 24

In reply to post #229803

In the UK there are 157 companies with a Quality score of 90 or above.

Just six of these companies have an Altman-Z score of below 2.

Seems like the Quality score is adequately weighted with regard Balance Sheet risk?


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iwright7 22nd Oct '17 23 of 24


Yes the Q Score is an excellent metric. The point though I was trying to make is that by combining a High F-Score with a very High-Z Score we are likely to find improving/quality companies that are very unlikely to go bust. This may become more important in a recession/bear market.

Another approach is to take your Q screen and add Alt Z Score >9 in which case the number of qualifying companies drops from 127 to 56 and if we then add in F-Score 8+ the number drops to a more manageable 27.

What I am really suggesting is rather than use the Z-Score as a minimum bankruptcy risk metric, is to think/screen a high Z number as a different high safety (Quality) metric. Ian

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organictrader 22nd Oct '17 24 of 24

In reply to post #231638

Great article, I’m fairly new to Stocko so would welcome a training session too. I’m Kent based, any others users in Kent for potential local Stocko group?


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About Ben Hobson

Ben Hobson

Stockopedia writer, editor, researcher and interviewer!


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