HomeHome SearchSearch MenuMenu Our productsOur products

Why you need to apply the F-Score to your Investment Portfolio right now

by , 17 May 2022
Why you need to apply the F-Score to your Investment Portfolio right now
If you've heard of ‘value investing', you may automatically think of Warren Buffett or Benjamin Graham, the man who coined the term - Value Investing - and, arguably the world's greatest value investor.

However, there's another person who revolutionised value investing, back in April 2000.

And he doesn't even invest!

He's a little-known accounting professor, who wrote a 57-page research paper called, "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers".

And the reason it's so relevant right now is because it's the only strategy that achieved positive results in the stockmarket crash of 2008.


If you’ve heard of ‘value investing’, you may automatically think of Warren Buffett or Benjamin Graham, the man who coined the term – Value Investing - and, arguably the world’s greatest value investor.

However, there’s another person who revolutionised value investing, back in April 2000.

And he doesn’t even invest!

He’s a little-known accounting professor, who wrote a 57-page research paper called, "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers".

And the reason it's so relevant right now is because it’s the only strategy that achieved positive results in the stockmarket crash of 2008.

And Boy does it work

The crux of his thesis is that: If you take a certain type of value stock, and apply what he coined an ‘F-Score’ ranking, you could significantly outperform the market.

Buying companies that pass this test, would’ve produced a 23% average annual return from 1976 through 1996 – more than DOUBLE the S&P 500!

10 years on, and this professor’s strategy received its biggest accolade.

In 2010, The American Association of Individual Investors – an investment advisory to 300,000 Americans – revealed, it was the ONLY strategy (out of 56 tested), that achieved positive results in 2008 – when the world’s stock markets crashed.  

It beat the average by over 74%!

And since then, any investor who has followed the “F-Score” ranking system, has easily outperformed the S&P500 …

A R100,000 would be worth over R900k today – more than 3x the S&P 500 return.

--------------------------------------------------------------------------------------
Discover how to start playing this decade's next megatrend.
We're living in what I like to call the "next decade of Value"... It's a once-in-a-generation shift in the market that you could ride out to boost your retirement and your lifestyle - but
only if you own "these group of stocks."

--------------------------------------------------------------------------------------
So how does the “F-Score” Ranking System work and who created it?

You’ve probably never heard of Joseph Piotroski., but he’s the professor that developed the powerful F-Score” ranking system. Today, he teaches at the Stanford Graduate School of Business.

So how does Piotroski’s “F-Score” system work?

Well the first thing the F-Score does, is focus on companies with low price to book (P/B) ratios – typically considered “value stocks”.

The problem with only considering this ration when evaluating a company is that a low P/B is not always a sign of a quality company at a low price but rather a company in financial distress.

So Piotroski refined the criteria for selecting value stocks.  First he selected only stocks with book/market ratios in the market's highest 20% -  i.e. stocks with the lowest P/B ratio.

Then he used accounting methods to determine if the company had real value…

He dug into a company's balance sheet, looking at cash flows from operations and returns on assets.

A company's cash from operations must be greater than its net income – i.e. that companies were making money because of their business, not because of one-time gains like accounting adjustments, lawsuit windfalls or selling one of their assets.

Then, he looked at a company’s ‘improvement’.  

Looking at the most recent year compared to the prior year, he wanted to see improvement (or at least no deterioration) in a firm's return on assets (ROA), which included:
•    Long-term debt/assets ratio to test a company’s solvency
•    Current ratio (current assets/current liabilities) -  an additional solvency test
•    Gross profit margin to assess a company's financial health and business model
•    Asset turnover to measures productivity
From this rigorous assessment he was able to simplify it into a series of simple tests - known as the “F-Score” ranking system.

And here’s how it works…

Test 1: Achieve positive net income in the current year
Test 2: Achieve positive free cash flow in the current year
Test 3: Achieve higher ROA compared with the previous year
Test 4: Cash flow from operations must exceed net income
Test 5: Achieve lower ratio of long-term debt compared with the previous year
Test 6: Achieve a higher current ratio
Test 7: Achieve a higher gross margin
Test 8: Achieve a higher asset turnover ratio
Test 9: Didn’t issue new shares or equity

If a company ticks 7-9 of these boxes, it’s a buy!

As I mentioned, earlier this ‘strategy’ has proven itself time after time, and it just might be useful to run the stocks in your portfolio through these tests to make sure you only have quality value stocks.

If you don’t have a portfolio and want to know where to look for these kinds of stocks then you need to get a copy of my latest report, How to profit from the next decade of Value, where
I detail three JSE stocks that meet these tests and stand to generate 200% even 300% or more in the coming years.

See you next week.
Josh Benton, Real Wealth

PS. Not sure what to look for when trying to find value on the JSE, then
read this.


Why you need to apply the F-Score to your Investment Portfolio right now
Rate this article    
Note: 4.25 of 6 votes

Related articles



Related articles




Trending Topics