Value investing strategies have produced some cracking results this year but surging equity prices could leave some investors wondering whether there are any cheap stocks left to be had. While it may be true that many risky shares have been being swept up in all the excitement, that doesn’t mean that value strategies can’t still outperform in these conditions. What’s essential, however, is a clear distinction between buying cigar butt shares at rock bottom prices and buying great shares that haven’t yet become expensive. It’s an approach that US finance professor Robert Novy-Marx describes as “the quality dimension of value”.

Guru Strategies focusing on Quality and Value

One of our best performing guru-inspired value screens this year is a strategy that plays on this combination of value and quality. The Piotroski F-Score price-to-book screen is inspired by the work of US finance professor Joseph Piotroski. He devised a way of scouring the very cheapest looking shares in the market for those with the best chance of rebounding and then outperforming. It’s done using a tough, nine-point accounting checklist that studies historical results to understand whether a company’s finances are strengthening. As Piotroski explained: “The success of the strategy is based on the ability to predict future firm performance and the market’s inability to recognize these predictable patterns.”

Piotroski’s brand of value investing often means picking over the bones at the bottom of the market for some often unloved and misunderstood shares. But it’s an approach that has pulled in some impressive gains over the summer from the likes of Pure Wafer (LON:PUR), John Swan and Sons (LON:SWJ) and Livermore Investments (LON:LIV). Stockopedia’s version of the F-Score screen has returned 48% so far this year but Piotroski isn’t the only one to combine value and quality in the search for shares that will outperform. Investment legends like Warren Buffett and Joel Greenblatt, both inspired by the celebrated father of value investing Benjamin Graham, have made fortunes with their own versions of the same basic approach to buying good, cheap stocks.

In the case of Greenblatt’s Magic Formula ranking system, just two metrics - earnings yield and return on capital employed - are used as proxies for ‘good’ and ‘cheap’. Over the past…

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