Came across Piotroski the other day and thought he might belong on this thread as another possible fundamental stock-picking method. Suspect the theory works best during a market beat-up though, as imagine the stocks get hard to find when the market is going okay.
Basic theory is to select from stocks with a low Price/NAV (lowest 20%) and then screen them for 9 success factors:
- positive ROA,
- positive Op Cashflow/Assets,
- annual increase in ROA,
- Op Cashflow > Net Profit (before abnormals),
- decreasing "leverage" long-term debt/assets,
- increasing current ratio (current assets/current liabilities),
- no new equity issued in past year,
- increasing annual % gross margin,
- increasing asset turnover (sales/assets).
The paper discussing the test of this theory is found
here.
According to
Forbes, it seemed the theory worked pretty well in 2008. Not particularly surprising - Pr/NTA based selection usually works best in a market rout. The screens would definitely help - and makes me wonder if just using the screens and ignoring the Pr/NTA might be more successful in other years.
Unfortunately, it's all very well having a nice screen tool like this, but having the database that will allow it to be used is probably not realistic. And, if doing the calcs manually, then might as well be working to look for stocks that seem likely to pass those screens on the next result, rather than on the historical one.