Joseph Piotroski’s F-Score is a financial assessment tool developed by Stanford accounting professor Joseph Piotroski in 2000. It’s used to evaluate the strength of a company’s financial position, particularly for value stocks with high book-to-market ratios. The F-Score is calculated using nine criteria that assess 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 high book-to-market companies.
One of the issues with the F-Score strategy is not the calculation of the F-Score itself, but rather the price-book criteria that is used for the initial screen. So we thought it would be interesting to take a look at the top stocks without it. But we also didn’t want to eliminate the value criteria all together since F-Score is intended to be applied to value stocks. So 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 F-Score is calculated.
What is F-Score?
The F-Score ranges from 0-9, 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 ROA is higher in the current year compared to the previous year.
- Accruals: 1 point if CFO > ROA in the current year.
Leverage, Liquidity, and Source of Funds Criteria:
- Change in Leverage (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 Current Ratio: 1 point if higher in the current year compared to the previous year.
- Change in Shares Outstanding: 1 point if no new shares were issued in the last year.
Operating Efficiency Criteria:
- Change in Gross Margin: 1 point if higher in the current year compared to the previous year.
- Change in Asset Turnover: 1 point if higher in the current year compared to the previous year.
The F-Score is the sum of the points from all nine criteria. A higher F-Score suggests a company is financially stronger, while a lower score indicates potential financial distress or weakness.
Five High F-Score Stocks
Here are five stocks with high F-Scores that also are in the cheapest 50% of the market along with the reasons they pass our other guru models in addition to having a perfect F Score.
Amalgamated Bank is a New York state-chartered bank offering a complete suite of commercial and retail banking, investment management, and trust and custody services. The bank operates through three branch offices across New York City, one in Washington D.C., one in San Francisco, one commercial office in Boston, and a digital banking platform.
AMAL passes several of Validea’s guru models with flying colors. It receives a perfect 100% score on the Twin Momentum Investor model based on Dashan Huang’s strategy, which looks for stocks with strong fundamental and price momentum. The bank’s fundamental momentum and twelve-month price momentum both rank in the top percentiles of Validea’s database.
Additionally, AMAL scores highly (93%) on 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, indicating 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 casual lifestyle use and high-performance activities. The company’s brand portfolio includes UGG, HOKA, Teva, and Koolaburra.
DECK excels in multiple Validea models. It scores 100% on 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 92% score, appreciating its strong and consistent earnings growth, sales growth, and reasonable P/E ratio relative to the market.
The stock also performs well (91%) in the P/E Growth Investor model, with its P/E of 30.20 considered favorable when compared to its robust earnings growth rate of 30.87%.
HAMILTON LANE INC (NASD: HLNE)
Hamilton Lane Incorporated is a private markets investment company providing solutions to institutional and private wealth investors worldwide. The company offers investment solutions across various private markets, including private equity, private credit, real estate, infrastructure, and venture capital.
HLNE scores highly on Validea’s Growth Investor model (92%) based on Martin Zweig’s strategy. The stock is appreciated for its strong earnings growth, consistent quarterly performance, and a P/E ratio that’s considered reasonable given its growth rate.
The company also performs well (89%) on the Momentum Investor model, which looks favorably upon HLNE’s impressive quarterly earnings growth, annual earnings consistency, and strong relative strength in the market.
HALLIBURTON COMPANY (NYSE: HAL)
Halliburton Company is a major provider of products and services to the energy industry. The company operates through two segments: Completion and Production, and Drilling and Evaluation, offering a wide range of services from cementing and stimulation to drilling and subsea operations.
While HAL doesn’t score as highly as some of the other stocks on Validea’s models, it does show strength in certain areas. The Acquirer’s Multiple Investor model, based on Tobias Carlisle’s strategy, gives HAL an 84% score. This model looks for cheap companies that could be potential takeover targets, considering factors like enterprise value and operating earnings.
HAL also scores well (64%) on the Value Composite Investor model, which uses a blend of value metrics to identify undervalued stocks.
Oddity Tech Ltd is an Israel-based company operating in the beauty and wellness sector. The company uses a tech platform to support a portfolio of brands and services, developing customized products using algorithms and machine learning models.
ODD scores exceptionally well on Validea’s Growth Investor model (92%) based on Martin Zweig’s strategy. The stock is lauded for its strong earnings growth, consistent quarterly performance, and reasonable P/E ratio relative to its growth rate.
The P/E Growth Investor model also gives ODD a high score (91%), appreciating its favorable P/E/G ratio of 0.78, which suggests the stock may be undervalued given its growth prospects.
Further Research
