At its base, the Montier C Score is simply a way to give you, the investor, an idea of the probability that a company is cooking their books. This score is from 0-6, and basically, the higher the C-score the higher the probability that something fishy is going on with their books.
The C Score is built of six different true/false variables. With every variable that is “true”, the score increases by one.
I created a simple screen that just started Montier C score > 3. Three being the halfway point I decided it was the perfect spot to test how well the score worked when it came to finding companies you don’t want to invest in. The below backtest are the results.
And here are the results. Not the complete failure that I was looking for, but it’s bad enough that I know I want to typically stay away from companies that have a C score of greater than 3 as they get a total return of just over 2% at a 7% Monthly standard deviation. Compare this to the S&P’s total return of over 600% at a much lower monthly standard deviation of 4.58%.
That being said, Montier himself suggests that you use a screener that states the following.
That’s much better. This “screen” actually lost money. Now, it’s a long way from a functional strategy but every investment strategy has to start somewhere.
This score was designed to find companies that may be interesting to short; but can it be used as a green flag to find companies to invest in? If a C score of greater than three means there is a higher probability that a company is cooking the books, does that mean that a lower C score suggests good bookkeeping habits?
It seems that it does. Though I wouldn’t use good bookkeeping habits as the sole reason to invest in a company, it is sure a fundamental factor that I would personally like to know before entering into a long term position.
In the end, the Montier C score is simply a way to identify companies that may be cooking their books in order to look better on paper. It was designed as a way to find companies to short, but has ended up working incredibly well as a green flag when looking at potential companies to go long on. Don’t be surprised if you see a couple of screens go up in the future where we utilize this score in our analysis.