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author Olivier Dambrine - September 1, 2011

We just completed backtests on our Piotroski price-to-book screener using our proprietary backtesting tool. (On Europe) We also loaded the portfolio into profitmapper so you can follow the charts day-to-day. The results are impressive. Between June 1999 and now, profitmapper shows a return of 525%! These results are even more astonishing if you compare this to the S&P600 Europe incl net dividends, which lost 15% during this period.

What's the theory behind this screener?

Many scientific studies confirm that buying a portfolio of low price-book companies will beat the market over time. It makes sense: you buy companies for less than what they're worth in their books. More experienced investors would argue that book value doesn't always give a true picture of the companies' value, and a full review of the assets will help get a better understanding of the real value. While this criticism is correct they can't deny the findings of these studies.

Joseph Piotroski had a closer look at the data and found that in a portfolio of lowest price-to-book companies, the profits were generated by only a few stocks. In fact 44% of the companies performed worse than the market. So he thought to himself: wouldn't it be great if we could filter out these companies?

Piotroski, being an accounting professor, wondered whether he could remove these rotten apples by looking at the companies' books for the last year. He devised a scoring system called the Piotroski F-Score, a 9 points scoring system based on profitability, funding and operational efficiency. It looks at simple things such as: 'has the company made more profit than the year before?' (+1 point) but also: 'is the company cooking the books by adjusting accruals?' (0 points). By using 9 points he was able to get enough signals to determine whether the company is really improving or not.

What he found in his research is that this score helped to predict the performance of these stocks. This was even more the case for small and medium sized companies.

After we read this research, we turned it into a stock screener. This screener ranks all companies based on price-to-book and filters out companies with a score of less than 7. This can be applied to not just Europe but all other monetary zones including the UK, North-America, Australia and Japan. As you can see in the results in the chart above, the results are amazing!

(Note: We didn't just make a screener out of this theory. In our research we found that the Piotroski score doesn't only work with low price-to-book companies but also when applied on top of the Greenblatt Magic formula list and our own ERP5 Stock Screener. As a result, the Piotroski score has become one of our core KPIs that we made available accross all screeners.)

It's important to note that the results in the chart were not achieved by a risky investment in only a few glamour stocks. Instead it was achieved by investing each year in a portfolio of 30 stocks. This ensures the portfolio is diversified (both geographically and by sector) and protected against bad performances of individual companies.

For an up to date performance of this strategy, visit Piotroski Stock Screener. We don't know what the next 10 year will have in store, but the markets will probably stay flat. So unless you have a crystal ball or have a natural ability to pick the future winners, why not try the Piotroski stock screener? Just imagine what this screeners could do when applied to your portfolio!

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