Using quality and momentum to find market beaters

Friday, Jun 28 2013 by
Using quality and momentum to find market beaters

With the FTSE 100 now trading at levels not seen since the start of this year – capitulating around 8.5% from May’s high of 6,840 points – investors have been dealt some short, sharp reality checks in recent weeks. But looking beyond the rash of stocks that have slipped in line with the market, it’s possible to find a number that have weathered the volatility remarkably well. Their combination of strong financial health and price momentum suggests that they are better placed than most to weather the rocky conditions and recover sooner if conditions improve. 

Nine reasons to be confident 

When Joseph Piotroski introduced his innovative financial checklist known as the F-Score in 2000, he used it to find bargain priced value stocks had the best chance of a turnaround. For the US accounting professor, a series of nine checks that scrutinised historic fundamentals for signs of improving financial health offered a way of separating likely winners from inevitable losers (you can read more about the components of the F-Score here). Using price-to-book as his valuation starting point, Piotroski found that high F-Scoring bargain stocks were well placed to outperform. 

At Stockopedia, our version of that Piotroski value screen has produced some impressive results over the past year, returning 49.9% against 9.6% for the FTSE. With a median market cap of £12.6 million, the current crop of candidates qualifying under Piotroski’s rules mostly comprises micro-cap bargain options – which won’t appeal to everyone. The good news is that in its short life the F-Score has earned a reputation for being a great deal more than a simple measure for rating stocks at the cheapest end of the market. In fact, smart money investors have rapidly adopted high F-Scores as a byword for quality, giving the system some institutional-grade credibility. For instance, last week I wrote about how the Global Equity team at Societe Generale were using the F-Score as a substantial part of the quality element in their Quality Income index for high yielding stocks. 

Prices that ignore volatility 

Screening the market for companies that are achieving a full nine out of nine on the F-Score produces a list of stocks that have largely enjoyed strong price performances over the last year but to find which of these stocks have held up best in the  recent inclement conditions we added 6-month and…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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

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About Ben Hobson

Ben Hobson


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