Book market

A review of Piotroski’s book/market model

QQuantitative investment strategies have grabbed headlines and attention in the world of finance, and represent a branch of passive investing that continues to dominate the market. Since 2009, the flow of funds to the “quant” sector has more than doubled, and a number of top fund managers are strengthening their quantitative teams and relying more on computer algorithms for stock picking.

The concept, however, is not new.

Joseph Piotroski Ph.D., an accounting professor at Stanford University (and a market guru who inspired one of the stock screening models I created for Validea), has largely slipped under the world’s radar. of investors, but has been at the forefront of the evolution of quantitative value-oriented investment models. In 2000, while teaching at the University of Chicago, he wrote an academic paper on stock investing that took Wall Street by surprise. His research focused on companies with high book market ratios – the type of unpopular stock whose book value (equal to total assets minus total liabilities) was high relative to the value investors gave them. attributed (measured as market capitalization, the share price multiplied by the number of shares outstanding).

There was little glamor or pizzazz in Piotroski’s search results. He used a series of accounting measures to develop a model that would identify high-market book companies that were likely to become winners. And his article, published just a year after he started teaching, was full of mathematical, statistical and accounting terms that would blind many non-professional investors. But the proof was in the pudding or, in this case, the balance sheet. Piotroski’s study found that buying high-market book companies that passed its tests (and shorting those that didn’t) would have produced an average annual return of 23% from 1976. to 1996, more than double the gain of the S&P 500 during this period.

Although Piotroski, who once characterized himself as a “value investor at heart”, was not the first to focus on the high stocks of the book market, his research went further than previous studies in meaning that they were aimed at weeding out companies that sported a high book. – market ratios due to underlying financial difficulties. The key to improving returns for investors, he argued, was identifying companies that were unfairly judged and therefore overlooked by Wall Street. To do this, it used a series of balance sheet criteria targeted in three main areas:

  • Profitability: Piotroski looked for companies with positive operating cash flow that exceeded net income, to ensure that a company’s profitability is not due to a one-time event, but rather comes from its operations .
  • Leverage/Liquidity: This category relates to changes in a company’s capital structure and its ability to meet future debt service obligations. Piotroski assumed that any increase in debt, deterioration in liquidity or recourse to external financing was a red flag.
  • Operational efficiency: This includes measures of how well a company uses what it has to earn money and grow its business.
  • Although value strategies have lagged in recent years, such trends follow cycles and will eventually reverse. No investment strategy – or stock price, for that matter – moves in one direction indefinitely. What works well in one market environment may not work well in another, and vice versa. The key for investors is to hedge against these cycles – as best they can – by building a diversified portfolio that can weather the vagaries of the market and hopefully minimize investor distress.

    On Validated , I have been a long-only Piotroski model since 2004 (portfolio of 20 stocks rebalanced every year) and the performance is highlighted below. I few things stand out. The model was a little slow to start during the 2004-2008 period, but after the end of the 2008/2009 bear market, the portfolio saw a massive move – returning over 72% in 2009 and 67% in 2010 In 2013, the portfolio grew by more than 35%, but since 2014 the strategy has fallen out of favor and so far this year it is also lagging the market. These concentrated value models can be quite risky, but as historical returns show, the long-term potential is significant and when value stocks are in favor, an approach like this can certainly produce alpha. .

    Using the stock picking models I created based on the investment philosophy of Piotroski and other market greats, I identified the following high-scoring stocks:


    Tropicana Entertainment (TPCA) owns and operates regional casinos and entertainment properties located in the United States and a hotel, timeshare and casino located on the island of Aruba. The company earns a perfect score under our Piotroski-inspired investment strategy due to its position in the top 20% of the market based on the accounting market ratio (0.89), its return on assets of 3.12% and operating cash flow of $133.73. million. It also gets high marks from our Peter Lynch-based screen for its price-earnings to earnings-per-share growth (PEG ratio) ratio of 0.36, which is considered very favorable. Our Kenneth Fisher-inspired investment strategy likes the company’s price-to-sales ratio of 1.22, which sits comfortably in the preferred range of 0.75 to 1.5.

    Vale SA (VALE) is a global producer of iron ore and iron ore pellets, essential raw materials for steelmaking, and a producer of nickel. Our Piotroski-based model likes the company’s return on assets of 3.35% along with its operating cash flow of $6.5 billion, and our Lynch-based screen favors the PEG ratio of 0.24 . The company’s upward trend in earnings per share over the past 2 quarters deserves high marks thanks to our David Dreman-inspired investment strategy.

    Telefonica Brasil SA (ADR) (VIV) is a mobile telecommunications company in Brazil that is favored by our Piotroski-based screening model for its accounting market ratio of 0.93 as well as its operating cash flow of $3.5 billion, which exceeds profit net of the most recent year, a plus in this model. The company also passes our Dreman-based screen due to its price-to-cash-flow, price-to-book, and price-to-dividend ratios, all of which are in the lower 20% of the market.

    Mitsui & Co.Ltd. (ADR) (MITSY) is engaged in product sales, logistics and financing, as well as the development of international infrastructure and other projects. Our filtering model based on Piotroski favors the upward trend in the company’s liquidity (the current ratio has increased from 1.67 to 1.77 in the most recent year) and the increase in gross margin on the same period, from 15.0% to 16.0%. The company’s book-to-market ratio of 1.33 is also considered favorable by this model.

    Genesco inc. ( GCO ) is a wholesaler and retailer of footwear, apparel and accessories that earns a perfect rating under our Benjamin Graham-based investment strategy given its liquidity (current ratio of 2.53) and debt at term which, at $136.4 million, is considerably lower than net current assets ($447 million), a plus in this model. Our Piotroski-inspired model favors the company’s book-to-market ratio of 1.35, which is in the top 20% of the market, and return on assets of 6.69%.

    At the time of publication, John Reese held positions at TPCA, VALE, VIV, MITSY and GCO.

    The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


    The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.