The Piotroski Nine-Point Test

I’m not a big fan of stock screens but I admire the work of Joseph Piotroski.

Dr. Piotroski is an accounting professor at Stanford. In 2000, he wrote an academic paper, “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers.”

Basically, he wanted to find what works with value investing. His strategy was to first find stocks with low valuations, then sort what cheap stocks would likely rebound.

Here’s the secret formula. Piotroski first takes stocks that have the lowest Price/Book Ratios. Then the stock has to pass eight of the following nine tests:

*The return on assets for the last fiscal year is positive.

*Cash from operations for the last fiscal year is positive.

*The return on assets ratio for the last fiscal year is greater than the return on assets ratio for the fiscal year two years ago.

*Cash from operations for the last fiscal year is greater than income after taxes for the last fiscal year.

*The long-term debt-to-assets ratio for the last fiscal year is less than the long-term debt to assets ratio for the fiscal year two years ago.

*The current ratio for the last fiscal year is greater than the current ratio for the fiscal year two years ago.

*The average shares outstanding for the last fiscal year is less than or equal to the average number of shares outstanding for the fiscal year two years ago.

*The gross margin for the last fiscal year is greater than the gross margin for the fiscal year two years ago.

*The asset turnover for the last fiscal year is greater than the asset turnover for the fiscal year two years ago.

According to Forbes, the system has worked very well.

A stock screen run by the AAII based on Piotroski’s approach has a 10-year return of 32.5%, compared to a return of 5.5% for the S&P 500 during that same period. The 5-year return is better, at 40%, compared to 5.9% for the S&P. Year-to-date through the end of July, the Piotroski screen is up an amazing 105.7% versus 18.2% for the S&P.

Posted by on January 21st, 2014 at 7:36 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.