The F-Score is a value investing strategy developed by Joseph Piotroski. In April 2000, Piotroski published a paper called, “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers,” in the Journal of Accounting Research. He showed that by analysing neglected stocks, as defined by having very low price to book ratios, and using a nine-point accounting-based test scale, you could significantly outperform the market.
The strategy focuses on looking for the highest quality stocks amongst the 20% best value stocks on the market (as defined by a low price to book value). Companies with low price to book ratios tend to have low levels of investor interest, be neglected by the analyst community, and be in financial distress. They are considered ‘value’ stocks because they are cheap, but are often cheap for a good reason.
Companies classified as strong must be profitable, have increasing margins, pass an accounting trick test, and have an improving balance sheet. One point is awarded if a company passes a test and zero if it doesn’t. The strongest a company can score is 9 while the weakest is 0.
The criteria for our strategy is as follows:
– Rank companies in ascending order using the price-to-book ratio
– Buy companies which score 8 or 9
– Sells companies with scores below 5.
When you log in, click ‘run’ on this strategy to find out how it performs.