We mention the Piotroski F-Score in a lot of our articles, videos, and even within a lot of our prebuilt screens. So, it poses the question, what exactly is the Piotroski F-Score?
Created by a professor of Accounting at the University of Chicago named Joseph Piotroski, the score is used to identify possible investments.
Here is the score built within the Equities Lab system using the Equihack language. For each line item that is deemed true a point is added to the score. For every line item that is not true, nothing is added to the score. The score itself is broken up into three different parts –
· Profitability – though not outlined in the editor, this contains the first four items of the score.
o Return on Assets must be above 0
o Operating cash flow must be above 0
o This year’s Return on Assets must be higher than last year.
o Operating Cash Flow/Total assets must be higher than the Return on Assets.
· Leverage – This contains the next three items of the score.
o Long term leverage must be lower than it was the previous year
o The Current Ratio must be higher than it was the previous year
o Total shares outstanding must be equal to or less than it was the previous year
· Operating Efficiency – the contains the final two items of the score
o Gross Margin must be higher than it was a year ago
o Asset Turnover ratio must be higher than it was a year ago
If all of the above are true for a company, it will have a perfect Piotroski score.
Just how many companies have a perfect Piotroski F-Score?
A total of 46 companies currently match a screen that searches for a perfect Piotroski score.
It’s time to see how perfect and almost perfect scores perform compared to the benchmarked S&P 500 over the past twenty years.
Perfect Piotroski Score
Here we have the backtest of all companies who fell into the “Perfect Score’ category. It returned over 13% annually at a standard deviation of 5.89%. Not too bad when the S&P returned less than 10% at a standard deviation of 4.59%. This may not seem like that big of a difference, but it’s almost an extra 300% at an almost equal risk profile – resulting in a Sharpe Ratio of .18 compared to the S&P’s of .14.
Loosen it up
So, we’ve proved that Mr. Piotroski’s score works; but a screen that only returns 46 results doesn’t really give us a lot of wiggle room to add more parameters to really build the screen we want. Let’s see how the strategy does if we loosen the constraints just a bit and include all companies with a Piotroski score greater than 7.
That’s a pretty big difference. We went from 46 results, to now over 200. Yes, when we backtest this strategy we do give up a little bit of performance, but we gain the freedom to add more parameters and really find those companies that we want to invest in long term.
With a little tweaking we are able to increase the performance to 17.24% annually with a Sharpe Ratio of .18 by simply adding P/E and market cap requirements in our High Piotroski and Low PE Top 10 Screen. Within our system there is no limit to the tweaks you can make to the screens, or even to the original formula, so play around with it and build the best performing screen you can – just be sure to go through the screen validation process to make sure that your screen is actually usable.
If you’d like to learn more about the Piotroski Score, we have a video that I have linked here for you to check out – don’t forget to like and leave any questions you might have in the comment section. Also, just as a forewarning, I don’t suggest jumping in and investing in every stock that you see the screener pop out, no matter how good the historical performance is. Do your due diligence and look into every potential investment you want to make. The screener is a tool to allow you to cut down your analysis time and give you a smaller pool of companies to look into, which is exactly what the Piotroski Score was designed for.