INVESTMENT STRAGIES - VALUE INVESTING Piotroski Criteria.

Piotroski Criteria

Piotroski thinks that the market often mis-prices firms with recent histories of poor
performance. Part of the reason for the mis-pricing is that such companies fall off the radar. Both analysts and investors ignore them. No one wants to invest in, say, a beaten-up poultry producer or a depressed concrete manufacturer, especially if glamour stocks in areas like telecom or biotech are rocketing skyward at the same time. Many of these deep value firms are not even covered by analysts or the press and so, if things do start to improve, management has no way to publicize the turnaround. Piotroski's analysis of his results suggests that his approach works particularly for small or mid-sized companies, firms with low share turnover, and companies with no analyst following. In all these cases, the market appears to be slow to reach to the good news that discerning readers of financial statements can detect early in a turnaround.

Select 20% of the universe of low PTBV:

• Profits. Positive current Net Income (adjusted Operating Profit: after-tax
Profit).
• Cash Generation. Positive current Operating Cash Flow.
• Earnings Quality. Current Operating Cash Flow>current Net Income.
• Financial Gearing. Recent Total Debt/Total Assets < last year.
• Liquidity. Current Ratio greater than previously.
• Asset Efficiency. Asset Turnover (Total Sales Revenue/Total Assets) greater
than previously.
• Profit Efficiency. Current ROA (after-tax Profit/Total Assets at start of year)
greater than previously.
• Oliver Twist Test. Total Shares Outstanding = < previous year.
• Profit Margins. Current Gross Profit Margin greater than previously.
• Momentum. Upward price movement in the last 3 months. (IC)

Select shares with scores of 8 or 9.

IC Piotroski Screen.

1. Cheapest 25% by PBV.

2. Market Cap of £10m to eliminate minnows.

3. ROCE >15% and trending up in last few years.

4. Interest Cover 2*+.

5. Positive Cash Flow and trending upwards in last few years.

6. PE > 3.

7. Operating Cash Flow per share>EPS.

8. Consistent Director Buying.

9. Screen out companies with Net Borrowings trending upwards.

10. Compare with sector peers on key ratios e.g. ROCE, Net Margin.