The Piotroski F-Score: A fundamental screen for value stocks

Tuesday, Apr 12 2011 by
The Piotroski FScore A fundamental screen for value stocks

In Brief 

The Piotroski F-Score aims to identify the healthiest companies amongst a basket of value stocks through applying a set of nine accounting-based stock selection criteria.

Background to the F-Score

Joseph Piotroski is now associate professor of accounting at the Stanford University Graduate School of Business. He developed the F-Score back in 2000 while at the University of Chicago. Piotroski recognized that, although it has long been shown that value stocks (or high book-to-market firms as he calls them) have strong returns as a group, there is nevertheless very wide variability in terms of the returns of these stocks.  He noted that: Embedded in that mix of companies, you have some that are just stellar. Their performance turns around. People become optimistic about the stock, and it really takes off [but] half of the firms languish; they continue to perform poorly and eventually de-list or enter bankruptcy.”

What he wondered was whether it was possible to weed out the poor performers and identify the winners in advance. He therefore sought to develop a simple accounting-based stock selection strategy for evaluating a stock’s financial strength. Piotroski's F-Score involves nine variables from a company’s financial statements. One point is awarded for each test that a stock passes. Piotroski regards any stocks that scored eight or nine points as being the strongest.

Does the F-Score work? 

Empirical analysis to test out the strategy in the UK market seems to be very limited. However, Piotroski’s research in the US does suggest that this type of fundamental analysis can be an effective value filter. By investing in the top performers, he showed that, over a 20-year test period from 1976 through 1996 that “the mean return earned by a high book-to-market investor can be increased by at least 7.5% annually”. Furthermore, he found that buying the top stocks in the market and shorting those that got the worst scores would have resulted in 23% annualized gains, more than double the S&P 500 broad market index return. Piotroski also found that weak stocks, scoring two points or less, were five times more likely to either go bankrupt or delist due to financial problems. 

More recently, the American Association of Individual Investors revealed that the F Score was the only one of its 56 screening methodologies that had positive results in 2008 (up 32.6% on average across…

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3 Comments on this Article show/hide all

jvspencer 7th Jan '14 1 of 3

Certainly an interesting analysis tool.

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bargainvalue 30th Nov '15 2 of 3

Recently, I have conducted the analysis of Piotroski F-score on LSE. You can check the results here:

Blog: Bargain Value
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PRB 2nd Feb '17 3 of 3

Beware the use of Piotroski F-score and other high-tech analytical indicators!!!! Example---
Michael Lewitt, an associate of the Money Map Press, and leader-Guru of the Zenith Trading Circle uses the Piotroski F-score as one of his key guides to identify potential "loser corporations". Along with his self-proclaimed successful career in investment management in the "short" market, M Lewitt uses the Piotroski F-score and several other high-tech analytical indicators in a very convincing scheme (pronounced SCAM) to bilk US$2000 a pop for annual subscriptions to the Zenith Trading Circle recommendations, which M. Lewitt's proclaims to be 94% accurate "can't lose PUT-BUYS". Sure enough, in his first year's operation, his recommendations have been over 94% successful (for him). Although Lewitt's recommendations are convincingly argued and confidently presented, his recommended PUT BUYS drop rapidly towards zero value well before expiry with over 94% accuracy. In addition to his US$2000 annual subscription income, Michael has had the opportunity to make massive gains by selling the same puts he recommends his paid subscribers buy-- a truly well done scam! Congratulations Michael!

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