Magic Formula
Sunday Times Challenge
Martin Zweig

PIOTROSKI | About Piotroski | BackTests Piotroski Blog

The Piotroski method is one of the most successful value investing systems, tracked monthly for the last 12 years by the American Association for Individual Investors (AAII). Over the last 11 years it showed 1,069% return, versus O'Neil s CANSLIM (1,489%) and the Zweig method (1,800%).

CANSLIM and Zweig are however BULL MARKET investment strategies, and Piotroski is the only BEAR MARKET screen tracked by the AAII that achieved in excess of 1,000% returns. Since we are in the throes of the largest bear market in 20 years on the JSE, we are very interested in Piotroski's methods!

Note how the Piotroski screen massively boosts the performance of low PB stocks on the S&P500. And look at how the Piotroski growth exploded from the trough of the 2003 bear and remarkably is showing 30% growth in 2008 when just about everything else is lying on the floor!

But how should we explain the sideways performance of Piotroski's method in the mad bull run of 2006 and 2007 and its good performance in the current crash? Quite simply, in the peak of a bull run, everyone is chasing hyped up growth stocks and not the low PB value stocks and in the bear market  everyone comes back to value strategies.

Given the current state of the markets now, it looks like a fine time to build up a Piotroski Portfolio! Here at PowerStocks we are going to do just that, building the first EVER published Piotroski Portfolio for the JSE, right in the midst of the largest JSE fall in 20 years. But first we need to do a cursory test it to see if it works on the JSE. Sure, there is a 90% chance it should but at PowerStocks we like to back test our theories on the JSE first.

PowerStocks put this to the test on the JSE, ranking the 5 year average growth of stocks together with their Piotroski "F" scores as at 28 April 2003 (trough of the last big bear market). We performed the tests with all JSE shares listed at that time and then also on those shares with Price:Book ratios of less than 1. The results are shown below (click image for more detail):

The results are rather remarkable, confirming Piotroski's theory for the JSE in the last market cycle. Note how Piotroski is a great bear market screen for ANY stocks (shown by the blue bars) but worked especially well for "undervalued" stocks (shown by the red bars) when F>6. Note how portfolios of shares selected with F>6 significantly outperformed the ALSI and the group average growths.

Note how the average growth of the group P2Bk<=1 is much larger than the average growth of the entire group, confirming the theory we postulated that undervalued share portfolios are much more likely to outperform coming out of bear markets than other stocks (See Price-to-Book strategy)

We can state that historically, Piotroski "F" scores greater than or equal to 7 for "undervalued" shares showed significant out-performance to the group average (of undervalued stocks) and the all-share index (ALSI) since the last bear market. Shares with  scores >6 also showed a lesser but still significant out-performance for all stocks regardless of their price/book ratios.

The most important observation we can make here is that even though Price:Book has been shown to be a stong, safe selection criteria for potential growth stocks, Price:Book coupled with the Piotroski valuation significantly enhances portfolio performance whilst significantly reducing portfolio size. The almost 1,200% performance of the portfolio of "undervalued" shares with F greater than or equal to eight is double the group average of undervalued stocks (588%) and triple the growth of the market-cap based ALSI index (350%).

NEW : The Piotroski Strategy is our top performing value portfolio we track live on the JSE since the 20 Nov 2008 trough. You can view its performance coming out of the 2008 JSE crash over at the Piotroski Blog.(Premium content)

NOTE : We are conducting 10 more similar tests on the JSE stretching back to 1990, to give us a larger statistical sample. We have concluded 4 such tests so far and the results from the 2003 test are being mirrored. We will publish these back-tests on this page when they are concluded.

PIOTROSKI | About Piotroski | BackTests Piotroski Blog

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