The Joseph Piotroski F-Score is a financial rating tool developed in 2000 by Joseph Piotroski, a professor of accounting at Stanford University. It is used to evaluate the strength of a company’s financial position, especially for value stocks with high book-to-market ratios. The F-Score is calculated using nine criteria that evaluate profitability, leverage/liquidity, and operating efficiency.
Piotroski developed this score as part of his research paper, “Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers,” published in the Journal of Accounting Research in 2000. His goal was to improve the performance of a value investing strategy by identifying financially strong companies with a high book-to-market ratio.
One of the problems with the F-Score strategy is not the calculation of the F-Score itself, but the price-to-book criterion used for the initial selection. So we thought it would be interesting to take a look at the top stocks without an F-Score. But we didn’t want to eliminate the value criterion entirely, since the F-Score is intended for value stocks. Instead, we filtered for stocks in the cheapest 50% of our database that have perfect F-Scores. But before we look at the stocks, let’s first look at how the F-Score is calculated.
What is the F-Score?
The F-score ranges from 0 to 9, with 9 being the best. Each criterion is binary (1 point if met, 0 if not). Here are the exact criteria used to calculate the F-score:
Profitability criteria:
- Return on assets (ROA): 1 point if positive in the current year.
- Operating cash flow (CFO): 1 point if positive in the current year.
- Change in ROA: 1 point if the ROA is higher in the current year compared to the previous year.
- Provisions: 1 point if CFO > ROA in the current year.
Criteria for leverage, liquidity and source of funds:
- Change in debt ratio (long-term debt): 1 point if the ratio of long-term debt to average total assets is lower this year compared to the previous year.
- Change in liquidity 3.0: 1 point if it is higher in the current year than in the previous year.
- Change in shares outstanding: 1 point if no new shares were issued in the last year.
Criteria for operational efficiency:
- Change in gross profit margin: 1 point if it is higher in the current year than in the previous year.
- Change in capital turnover: 1 point if it is higher in the current year than in the previous year.
The F-score is the sum of the scores from all nine criteria. A higher F-score indicates that a company is financially stronger, while a lower score indicates potential financial difficulties or weaknesses.
Five stocks with high F-scores
Here are five stocks with high F-scores that are also among the market’s cheapest 50%, along with reasons why they pass our other Guru models in addition to their perfect F-score.
AMALGAMATED BANK (NASD:AMAL)
Amalgamated Bank is a New York State chartered bank offering a full range of commercial and retail banking, investment management, and trust and depository services. The bank operates three branches in New York City, one in Washington DC, one in San Francisco, a branch office in Boston, and a digital banking platform.
AMAL passes several of Validea’s Guru models with flying colors. It receives a perfect score of 100% in the Twin Momentum Investor model, which is based on Dashan Huang’s strategy and looks for stocks with strong fundamental and price momentum. The bank’s fundamental momentum and 12-month price momentum are both in the top percentiles of the Validea database.
In addition, AMAL performs very well (93%) in the P/E Growth Investor model based on Peter Lynch’s strategy. The stock’s price-to-earnings ratio of 9.18 relative to its growth rate of 21.20% results in a favorable P/E/G ratio of 0.43, suggesting that the stock may be undervalued relative to its growth prospects.
DECKERS OUTDOOR CORP (NYSE: DECK)
Deckers Outdoor Corporation designs, markets and distributes footwear, apparel and accessories for both everyday recreational use and high-performance activities. The company’s portfolio of brands includes UGG, HOKA, Teva and Koolaburra.
DECK scores highly in several Validea models. It scores 100% in the Twin Momentum Investor model, with both its fundamental and price momentum ranking in the top percentiles. The Growth Investor model, based on Martin Zweig’s strategy, gives DECK a score of 92%, recognizing its strong and consistent earnings growth, revenue growth, and reasonable P/E ratio compared to the market.
The stock also performs well in the P/E Growth Investor model (91%), with its P/E ratio of 30.20 being considered cheap compared to the robust earnings growth rate of 30.87%.
HAMILTON LANE INC (NASD: HLNE)
Hamilton Lane Incorporated is a private markets investment firm providing solutions to institutional and private wealth investors worldwide. The firm offers investment solutions across a range of private markets, including private equity, private credit, real estate, infrastructure and venture capital.
HLNE scores highly in Validea’s Growth Investor model (92%) based on Martin Zweig’s strategy. The stock is valued for its strong earnings growth, consistent quarterly performance and a P/E ratio that is considered reasonable given its growth rate.
The company also scores highly in the Momentum Investor model (89%), with HLNE’s impressive quarterly earnings growth, year-on-year earnings consistency and strong relative strength in the market all being viewed positively.
HALLIBURTON COMPANY (NYSE:HAL)
Halliburton Company is a major provider of products and services to the energy industry. The company operates in two segments: Completion and Production and Drilling and Evaluation. It offers a wide range of services from cementing and stimulation to drilling and subsea operations.
Although HAL does not perform as well as some other stocks in Validea’s models, it does show strength in certain areas. The Acquirer’s Multiple Investor model, based on Tobias Carlisle’s strategy, gives HAL a rating of 84%. This model looks for cheap companies that could be potential takeover targets, taking into account factors such as enterprise value and operating profit.
HAL also performs well (64%) in the Value Composite Investor model, which identifies undervalued stocks using a mix of value metrics.
ODDITY TECH LTD (NASD:ODD)
Oddity Tech Ltd is an Israel-based company operating in the beauty and wellness sector. The company uses a technology platform to support a portfolio of brands and services and develops customized products using algorithms and machine learning models.
ODD scores exceptionally well in Validea’s Growth Investor model (92%), which is based on Martin Zweig’s strategy. The stock is praised for its strong earnings growth, consistent quarterly performance and reasonable P/E relative to its growth rate.
The P/E Growth Investor model also gives ODD a high score (91%), acknowledging its favorable P/E/G ratio of 0.78, which suggests the stock may be undervalued given its growth prospects.
Further research
Stocks with high Piotroski F-Score
Joseph Piotroski Portfolio
Cheapest value stocks
