Twelve months ago we looked at the strong performance of a stock screening formula that seeks out the cheapest shares in the market and then highlights those that are in the best financial shape. The Piotroski low price-to-book screen has continued its strong run so far this year – but perhaps there's a way to further improve the potential performance. By adding one of the most predictive factors of all – relative price strength – can we isolate which of these bargain bucket stocks are most likely to be in recovery?
The engine of this value investing technique is Joseph Piotroski’s nine-point accounting-based test known as the F-Score. As discussed in detail here, the criteria are broken into three sections starting with profitability signals followed by leverage, liquidity and source of funds and, finally, operating efficiency. So far this year, applying this test against the cheapest companies in the market on a price-to-book basis has been the superior performer among Stockopedia’s three Piotroski-based screens.
In the year since we last looked in depth at the Piotroski performance, the companies that we highlighted have gone on to perform as expected – two have risen in price (Persimmon (LON:PSN) and Inland Homes (LON:INL) ), two have lost ground and one is where it was 12 months ago. There are no quick fixes promised – this is a value screen for the long term – but the overall performance of the basket year-to-date is an impressive 30.4% versus the FTSE.
While companies that emerge on the list may at first seem like basket cases, the theory is that their robust fundamental health could signal a brighter longer term future. This combination of value and fundamental momentum has been shown to be a powerful indicator of stocks that could be worth closer inspection. What the screen doesn’t show however, is which of these stocks has benefitted from the positive price momentum seen in the market during the second half of 2012. Relative strength on a six month basis is acknowledged to be an influential guide to shares that may have further to rise. So by combining value with the F-Score and relative strength you get a glimpse of which among the cheapest stocks in the market are gaining momentum both fundamentally and technically.…
