Analyzing “Piotroski Style” Stocks

What does a Quantext Portfolio Planner (QPP) analysis look like for some of the stocks that passed the Piotroski screen? Below is such an analysis. AWRFC data was not available and NPTN came up with too short of a record, thus cutting the number of companies to ten.

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Screening For Top Stocks

Piotroski Stocks

One of the default screens found within AAII's "Stock Investor Pro" software is the Piotroski: High F-Score.  Joseph Piotroski is an accounting professor from the University of Chicago.  As readers will see in a moment, it is a simple screen with few requirements.  However, the financial screen cuts the number of stocks down to a minimum.  Combined with the Price/Book screen and we are down to 12 stocks at the end of May.

In the following screen, I applied my social screens and they did not eliminate one of the 12 companies.  In the first screen, we are looking for "Fama-French" stocks.  This means we are looking for high value oriented stocks or companies that are beaten down.  In other screens we eliminate over-the-counter stocks.  Check out the Piotroski screen below and then scroll down the page to see the 12 companies that pass this stringent screen.

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Active, Passive and Mosaic Investing

Mosaic As An Investing Style

The subject of active vs. passive investing came up a few times on a forum where I'm active.  Readers know my inclination toward passive investing rather than an active investing style.  This link was cause for one of the discussion points as the "Intelligent Speculator" author speaks of "looking for high quality dividend stocks that help us build a passive income portfolio."  Most definitions of "passive" do not include the active decision of selecting individual stocks.

Anytime the passive vs. active discussion arises, it is well to review Harold Evensky.  In this link, I quote from Evensky's book, one of my standard references. Evensky makes a clear distinction between passive and index investing, a break that is frequently overlooked by the investing community.  Although I tend to lean strongly toward the passive end of the investing spectrum, I prefer to be called a Mosaic investor.  A Mosaic investor is one who constructs portfolios using index mutual funds and non-managed index ETF as the principle building blocks.  This allows room for adding a few specialized stocks.  If forced to be more specific, I would argue a Mosaic investor does not invest more than 10% to 15% of the portfolio in individual stocks.

The investing spectrum runs from day traders (or should I say – nano-second traders) to index investors.  The vast majority of investors lie between those two extremes.  According to Evensky, a passive investor will still make active investing decisions to rebalance a portfolio.  However, a passive investor will not time the market, nor do they think they can outsmart the market by their intellect.  The two key points William Sharpe makes in his famous article, "The Arithmetic of Active Management," (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar.  Rick Ferri demonstrates this in his recent book, "The Power of Passive Investing."  Ferri's book is one I highly recommend.

Pay close attention to number 2 as that is the primary reason for becoming a passive investor.  Why do most investors fall into the active camp?

  • Ignorance of the facts.
  • Inadequate portfolio monitoring so investors are unaware of how well their portfolio is performing with respect to an appropriate benchmark.  This is a specific form of ignorance.
  • Advertising mis-leads investors.  Keeping investors active is a multi-billion dollar business. Passive investing reduces cost and that is the crux of Sharpe's argument.
  • Parents pass on their personal knowledge.  We tend to behave as we are taught.  If it was OK for dad, it is OK for me.
  • Everyone wants to think they are above average.  Why would anyone want to be just average?
  • Passive investors are dull at the water cooler. It is fun to discuss a hot stock.  Little attention is paid to cold stocks.

When it comes right down to the wire, investing is all about discipline.  The discipline of saving, laying out a thoughtful plan, and sticking with the plan by using a portfolio monitoring system.  This blog, ITA Wealth Management, is all about these three disciplines.