The Piotroski Screen

Joshua Lipton from Forbes.com writes “Who Is Joseph Piotroski?  You won’t find him blabbering on cable news about his latest stock picks or boasting about his returns on the lecture circuit. But what Joseph Piotroski lacks in fame and fortune, he makes up for with a unique investment strategy that generates excellent results..”

I am a fan of Joseph Piotroski’s method of scanning for under-valued companies for potential investment.  By nature, I am first a value investor (Buffett, Piotroski, Graham, etc.), however I like to buy and sell based on technical analysis, so I’m sort of a hybrid of sorts. 

There are nine criteria for Piotroski’s system.  A point is awarded to each category, thus a company with a score of nine is elite.  You won’t find a long list of companies on this screen at any one particular point in time; however you will see companies which are undervalued based on specific historical financial statement criteria.  I have had a difficult time finding a good screener to run this on a consistent basis, because some of the criteria is very specific and relies on two periods of data.  Most stock screeners only allow you to utilize one period of data (i.e. companies with ROA of higher than X%, as opposed to companies with ROA greater than the prior period).

The nine criteria are as follows:

Profitability

• Positive return on assets in the current year (1 point).
• Positive operating cash flow in the current year (1 point).
• Higher return on assets (ROA) in the current period compared to the ROA in the previous year (1 point).
• Cash flow from operations are greater than ROA (1 point)

Leverage, Liquidity and Source of Funds

• Lower ratio of long term debt to in the current period compared value in the previous year (1 point).
• Higher current ratio this year compared to the previous year (1 point).
• No new shares were issued in the last year (1 point).

Operating Efficiency

•  A higher gross margin compared to the previous year (1 point).
• A higher asset turnover ratio compared to the previous year (1 point).

 The Graham Investor website has a tool which ranks companies by Piotroski score.  The catch is that I do not know how often this is updated (seems like recently updated) and also not sure what list of companies the data is pulling from, i.e. what is the total population?  Anyhow, there are two companies with a score of nine currently, as follows:

Tennant Company (TNC)

Intuitive Surgical (ISRG)

Most of the leaders historically on the Piotroski screen are not loved by the markets, hence the solid financials but under-valued when compared to stock price.  The Piotroski screen has outperformed the market by double-digits since inception and could be a good tool to research stocks, but as always not foolproof.  You still would need to conduct your own due diligence and additionally decide when to enter and exit a trade, that is unless you are investing for the long-long-long-term in a buy-and-hold strategy.