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number cruncher


What are we looking for?

The overlooked, the unsung, the anti-heroes. To be more precise, we're on the hunt for stocks that are languishing in the bargain bin, but have decent fundamentals.

The screen

Joseph Piotroski, a professor at Stanford University, has discovered that applying a battery of accounting tests to a portfolio of value stocks can improve returns by eliminating ones that are financially too weak to recover and spotlighting ones with improving fundamentals.

We asked our friends at for help in finding stocks that score high by Prof. Piotroski's standards. (The Globe and Mail has a distribution agreement with, a premium Canadian stock screen service.)

In keeping with Prof. Piotroski's strategy, Validea's first step was to select stocks trading in the top 20 per cent of the market based on their book-value-to-market ratio. These are usually stocks trading in deep value territory.

To avoid the risks inherent in small stocks, Validea looked only at companies that met certain liquidity requirements. It assessed each stock on the Piotroski scorecard, giving it a "pass" or "fail" on each of nine criteria:

-Return on assets: Pass if return on assets (ROA) is positive.

-Change in return on assets: Pass if this year's ROA exceeds prior year's.

-Cash flow from operations: Pass if the most recent year's cash flow was positive.

-Cash compared to net income: Pass if cash from operations is greater than net income.

-Change in long-term debt vs. assets: Pass if the ratio of long-term debt to assets has decreased from prior year or stayed the same.

-Change in current ratio: Pass if the current ratio has increased from prior year.

-Change in shares outstanding: Pass if the number of shares outstanding is no larger than year-ago figure.

-Change in gross margins: Pass if gross margin has increased over prior year.

-Change in asset turnover: Pass if asset turnover for the most recent year is greater than asset turnover for the previous year.

What we found

The accompanying list shows the top 10 companies by Piotroski standards in Canada and the United States, with their scores.

Prof. Piotroski found that a pattern of buying U.S. value stocks with high Piotroski scores while simultaneously shorting those with low scores would have produced annual returns of 23 per cent between 1976 and 1996.

It's worth noting, though, that Piotroski-based strategies tend to go through good periods and bad periods. Readers should do their own research before buying any of the stocks here.

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