Not all value stocks are created equal - even if they offer strong dividend growth characteristics. I have been doing some research lately on stock screens to identify potential investment candidates and was reminded of a scoring methodology called the Piotroski scoring method. The premise is that of the large number of value stocks available to investors at any one time, only a few of them really provide the good returns that make value investing seem worthwhile. The trick is to screen out the bottom of the barrel of the value stocks and select only those companies that truly have a strong chance at survival. Here is the criteria that make up the Piotroski test.
1. Return on assets greater than zero.
2. Cash flow from operations greater than zero.
3. Return on assets in the most recent year higher than the year before.
4. Cash flow from operations greater than income.
5. The ratio of long-term debt to assets has decreased in the last year.
6. The current ratio -- current assets divided by current liabilities -- has increased in the past year.
7. The firm did not issue shares in the past year.
8. Gross margins have improved in the past year.
9. Asset turnover -- revenue divided by total assets -- has improved in the past year.
Again, these criteria are designed to weed out the bottom of the barrel of the value stocks. Of the stocks that pass, the notion is that the investor can be assured that they are al least strong enough to survive and in fact may be set up for future success. The data shows strong support for this, and the screen run over at the members section of the AAII shows very good performance. My approach with this screen is to use it as a further tool to analyze my stocks as opposed to a buy list.
If you have used this method successfully in the past, please let me know.
This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.
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