2008 AAII Stock Screen Roundup: Piotroski Strategy Defeats the Bear
Wayne Thorp recently spoke at the 2015 AAII Investor Conference. For information on how to subscribe to recordings of the presentations, go to www.aaii.com/conferenceaudio for more details.
To borrow from Thomas Paine: These are the times that try investors’ souls.
For many investors, 2008 cannot end soon enough. The market, as defined by the S&P 500, spent most of the first nine months of the year moving within two rather well-defined trading channels—the first lasted from the start of the year through late June, and the second from late June through late September. At that point, stocks picked up momentum on the downside, until they hit an intermediate low in late October, and then rallied almost 9% leading up to the Presidential election.
However, the rally was short-lived, and after Election Day the swoon deepened: At the close on December 5, 2008, the S&P 500 index was down 40.3% since January 1.
If the year had ended there, this would have been the worst single-year performance for the S&P 500 since it lost 35.03% in 1937 and would rank second only to 1931, when the index lost 43.43%.
During periods like this, very few long-only stock selection strategies generate gains, and AAII’s stock screens are no exception. Of the 56 screening methodologies tracked on AAII.com, only one has a positive year-to-date return. Compare this to the 20 that were up year-to-date at mid-year 2008.
Further reflecting the overall weakness in stock investing, three of the six all-time worst months in terms of average decline for all AAII stock screens took place during 2008.
The bottom line in terms of performance: For only the second time since AAII started to track its stock screens, the median performance for all of the methodologies covered is negative, at –41.7%.
Ranking the Annual Performance
Table 1 summarizes the performance and volatility of the stock screens built into AAII’s Stock Investor Pro fundamental stock screening and research database program and tracked on AAII.com.
The table presents the price change performance for the various screening methodologies, along with major stock index performance data.
The 56 screening approaches tracked on AAII.com are grouped based on their investment style—value, growth, etc.—with additional specialty and sector approaches broken out separately. The table ranks the screening approaches within each of these groups in descending order by their year-to-date performance as of December 5, 2008.
The Top Screen for 2008
The screen based on the low price-to-book-value strategy developed by Joseph Piotroski, an accounting professor from the University of Chicago, was the sole screening strategy to find itself in positive territory in 2008, with a 32.6% gain through December 5.
The price-to-book-value ratio is determined by dividing market price per share by book value per share. Book value is generally determined by subtracting total liabilities from total assets and then dividing by the number of shares outstanding. It represents the value of the owners’ equity based upon historical accounting decisions.
The AAII Piotroski screen starts with stocks with price-to-book ratios that rank in the lowest 20% of the entire Stock Investor Pro database. Piotroski found that most stocks trading with an extremely low price-to-book-value ratio were neglected firms or financially troubled firms. He found that either situation can create buying opportunities—after checking on financial strength—especially when studying smaller-cap stocks.
Piotroski developed a nine-point scale that helps to identify stocks with solid and improving financials. Profitability, financial leverage, liquidity, and operating efficiency are examined using popular ratios and basic financial elements that are easy to use and interpret.
For AAII’s Piotroski screen, a passing stock is required to have a perfect score of nine.
The Monthly Holdings columns in Table 1 provide data on portfolio holdings over time—the average total number of stocks that were in each portfolio over the last 11 years and the average turnover percentage from month to month. On average, five companies have passed the Piotroski screen since 1998, but during 2008 the screen averaged less than two passing companies each month. The median number of passing companies for all of the AAII stock screens is 25.
Furthermore, the approach has generated no passing companies for each of the last four months. As a result, this screen’s strong 2008 performance came from holding only a handful of companies, while also sitting on the sidelines during the recent market collapse. (For more on the individual stocks that propelled the Piotroski screen forward this year, along with the criteria for passing the screen, see the accompanying sidebar on pages 22 and 23).
The Turnover % column gives an indication of the how many stocks leave a given strategy from month to month. Every month, these portfolios are rebalanced and only those companies passing the screen for a given month are held. The lower the percentage turnover, the greater the chance that a company will pass a screen month after month.
The Piotroski screen has averaged a 30.5% monthly turnover rate, which is slightly below the median turnover for the strategies tracked by AAII, which is 31.5%.
As a general rule, approaches that focus on value tend to have less portfolio turnover than the pure growth approaches; they also tend to be less volatile and outperform other approaches during bear markets.
The Piotroski low price-to-book screen may have led the pack in 2008 with a concentrated portfolio of micro-cap value, but remember that past performance is no guarantee of future success.
This marks the second time since 1998 that the Piotroski screen was the best-performing strategy, with 2001 being the other year. After gaining 100.2% in 2001, the Piotroski approach lost 15.9% in 2002.
When measuring performance, the risk of the strategy should also be considered. The Monthly Variability columns report the greatest monthly percentage gain and loss as an indication of the volatility that occurred over the last 11 years.
The Piotroski approach had a maximum loss of 17.2% in value during a single month, and has gained as much as 34.3% in one month. By way of comparison, the most that the S&P 500 index gained in a single month was 9.7%, and its largest single monthly loss was 16.8%. The Monthly Variability columns also report the monthly standard deviation over the full study period. Standard deviation is a measure of total risk, expressed as a monthly change that indicates the degree of variation in return experienced relative to the average for a strategy over the test period. The higher the standard deviation, the greater the total risk of the strategy.
The 8.1% monthly standard deviation of the Piotroski screen is the second-highest figure in the value category and well above the 4.6% figure of the S&P 500.
|Value Strategies||Price Gain (%)||
|Dividend (High Relative Yield)||-25.9||-9.6||14.5||-1.0||19.1||27.9||0.4||24.1||23.3||-2.1||6.3||84.9||4.4||12.5||-14.2||39.0||20.7|
|Weiss Blue Chip Div Yield||-30.7||4.5||14.2||6.4||13.6||48.9||-14.1||25.6||18.8||3.9||3.3||104.8||5.8||14.3||-16.8||12.0||25.2|
|Dreman With Est Revisions||-37.1||4.3||39.8||9.3||35.0||69.2||16.6||-29.9||38.7||6.7||10.7||206.6||6.5||15.2||-26.2||13.0||81.1|
|Graham—Defensive Inv (Non-Utility)||-39.1||20.6||26.6||26.2||11.7||32.7||3.1||61.5||12.0||3.6||9.6||267.6||6.2||15.7||-17.3||17.0||21.4|
|Cash Rich Firms||-43.1||7.7||17.2||-2.5||18.6||64.0||-9.4||20.1||40.5||37.1||-3.8||175.1||6.6||17.6||-20.7||32.0||24.4|
|Dogs of the Dow||-46.8||-1.8||26.8||-9.8||-1.3||20.4||-9.8||-1.2||4.1||5.7||9.8||-23.6||5.5||16.1||-16.6||10.0||6.9|
|Fundamental Rule of Thumb||-51.6||4.1||31.0||5.0||49.6||83.3||4.7||42.3||28.7||11.7||-9.4||269.1||7.8||33.8||-19.2||50.0||21.9|
|Dogs of the Dow—Low Priced 5||-59.3||-2.7||34.9||-11.8||6.1||17.6||-6.5||7.2||3.2||-2.0||24.6||-25.8||6.9||19.4||-21.8||5.0||15.8|
|Growth & Value Strategies||Price Gain (%)||
|Stock Market Winners||-34.7||13.0||-5.5||25.9||9.6||131.5||32.1||41.6||27.6||21.7||-12.0||469.1||6.9||22.0||-23.4||14.0||59.7|
|O’Shaughnessy—Sm Cap Grth & Val||-35.1||29.6||36.2||19.1||26.8||107.5||0.8||13.4||13.2||21.1||33.6||651.1||7.0||18.5||-18.2||25.0||47.1|
|Value on the Move—PEG W/Est Grth||-41.5||29.5||18.3||23.1||54.1||87.0||7.9||34.8||22.9||11.0||2.1||544.7||6.2||15.7||-23.1||48.0||43.7|
|Value on the Move—PEG W/Hist Grth||-42.2||20.7||9.1||17.2||32.5||50.1||12.1||22.4||19.4||18.0||1.5||248.1||4.9||12.7||-19.1||98.0||36.2|
|O’Shaughnessy—Grth Mkt Lead||-46.0||15.5||9.6||18.9||6.7||26.2||-8.9||5.7||-9.0||16.8||35.3||51.5||5.6||13.6||-18.6||10.0||42.5|
|Rule #1 Investing||-48.9||-11.7||2.5||-6.7||13.5||48.0||-29.4||38.0||15.0||41.4||7.9||23.9||8.1||27.0||-26.8||14.0||26.2|
|T. Rowe Price||-59.2||-7.1||-11.3||23.1||44.9||39.2||-15.1||8.4||35.2||-4.5||1.8||1.1||6.9||18.3||-18.7||11.0||31.6|
|Foolish Small Cap 8 Revised||-63.0||13.5||44.6||15.3||-3.9||67.8||22.2||29.5||51.5||36.5||12.4||315.2||9.4||28.1||-24.2||7.0||31.5|
|Growth Strategies||Price Gain (%)||
|O’Neil’s CAN SLIM||-10.5||30.4||29.5||24.1||-3.8||79.0||20.5||54.4||38.0||36.6||28.2||1351.3||6.9||23.6||-23.1||9.0||54.8|
|O’Neil’s CAN SLIM Revised 3rd Ed||-27.6||31.4||-5.4||-1.0||-2.6||74.7||-10.3||33.4||96.3||59.0||7.8||511.1||8.8||52.7||-26.7||10.0||62.3|
|Inve$tWare Quality Growth||-28.9||-10.9||0.9||14.9||18.0||33.3||-25.0||8.0||18.5||-3.0||14.5||23.3||5.8||18.2||-22.0||26.0||11.5|
|Return on Equity||-39.1||7.2||8.7||17.6||23.9||46.9||-3.8||18.1||31.4||1.0||18.8||172.2||5.8||13.0||-22.2||35.0||20.4|
|IBD Stable 70||-42.4||-10.6||6.9||1.8||29.0||48.4||-11.0||9.5||23.9||3.6||21.9||63.3||5.4||12.0||-21.9||51.0||11.6|
|Foolish Small Cap 8||-56.0||-2.8||9.4||22.6||10.1||107.7||-19.4||-8.6||24.2||80.9||17.7||155.6||9.7||38.8||-22.5||22.0||36.3|
|Sector/Specialty Strategies||Price Gain (%)||
|Graham—Defensive Inv (Utility)||-20.4||1.8||29.4||18.5||16.2||16.6||-15.9||5.2||51.4||-8.4||14.6||136.6||4.4||12.0||-11.0||16.0||15.8|
|Est Rev Up 5%||-29.1||25.7||40.3||24.5||25.8||75.0||12.9||-8.1||3.6||107.1||43.3||992.4||8.8||30.8||-21.7||42.0||92.3|
|Est Rev Up||-37.4||13.7||21.8||17.3||25.2||57.3||0.8||-3.5||2.2||38.2||29.9||257.1||6.0||12.2||-18.6||169.0||81.3|
|Est Rev Down||-48.1||-20.0||12.9||-0.4||13.4||51.8||-43.8||26.7||-7.1||21.9||-15.0||-44.9||7.4||17.6||-25.3||204.0||78.9|
|Dual Cash Flow||-50.6||-7.3||20.4||10.4||24.7||66.9||-13.9||24.6||5.7||114.3||0.9||210.3||7.2||34.7||-23.6||63.0||31.4|
|Est Rev Down 5%||-53.0||-24.7||26.1||2.5||8.0||70.9||-61.5||28.3||-4.2||27.8||-3.9||-50.9||9.1||23.6||-30.5||75.0||88.9|
|Insider Net Purchases||-55.3||-10.9||4.8||-14.6||33.5||86.8||-20.9||21.8||-38.3||7.5||nmf||-43.2||8.4||26.7||-27.2||28.0||28.4|
|Indexes||Price Gain (%)||
|All Exchange-Listed Stocks||-49.8||-4.5||17.2||4.5||22.8||81.1||-13.3||21.2||-14.2||35.1||5.9||68.5||6.5||23.9||-22.1|
|Dow Jones 30||-34.9||6.4||16.3||-0.1||2.6||25.3||-16.8||-7.1||-6.2||25.2||16.1||9.2||4.5||11.8||-15.1|
|S&P 500 Growth (w/divs)||-36.8||9.1||11.0||1.1||7.0||27.1||-28.1||-16.1||-19.1||37.4||38.2||-2.7||5.4||10.8||-16.5|
|S&P 500 Value (w/divs)||-39.8||2.0||15.3||8.7||15.0||30.4||-16.6||-8.2||-0.5||4.9||18.9||9.6||4.3||9.6||-17.1|
|S&P MidCap 400||-42.0||6.7||9.0||11.3||15.2||34.0||-15.4||-1.6||16.2||13.3||17.7||49.4||5.5||12.0||-21.8|
|S&P MidCap 400 Growth (w/divs)||-41.8||13.5||5.8||14.4||15.8||37.6||-19.7||-2.6||15.8||36.1||37.2||115.7||6.3||19.0||-22.2|
|S&P MidCap 400 Value (w/divs)||-38.4||2.7||13.4||10.8||17.2||33.8||-9.4||1.4||19.5||-2.6||3.7||38.0||4.9||10.9||-21.8|
|S&P SmallCap 600||-37.4||-1.2||14.1||6.7||21.4||37.8||-15.3||5.7||11.0||11.5||-2.1||36.6||5.7||13.3||-20.2|
|S&P SmallCap 600 Growth (w/divs)||-37.3||5.6||10.6||7.3||24.3||38.5||-16.6||3.0||7.6||19.7||-0.1||49.4||6.1||17.0||-21.7|
|S&P SmallCap 600 Value (w/divs)||-35.2||-5.5||19.6||8.5||21.1||39.2||-12.9||9.5||15.8||4.9||-2.6||51.0||5.3||12.8||-19.6|
|Unless otherwise stated, figures do not include dividends or transaction costs.||*Through 12/5/2008.|
|Screen results are not realistic as to what an investor could achieve in the real world.|
Don’t Forget Dividends
The Total Price Gain column in Table 1 represents the percentage amount each hypothetical portfolio has appreciated or lost from January 1, 1998, through December 5, 2008. Note that this does not include dividend payments or dividend reinvestments. Large-cap strategies, such as the Dogs of the Dow, would be penalized the most by this type of dividend reinvestment exclusion.
The current average dividend yield of the stocks passing the Dogs of the Dow screen is 6.8%; investors holding the shares of these companies would actually have a return that is higher by approximately this amount annually.
The Long-Term Winner
The strongest price gain among the AAII stock screens over the last 11 years comes from the Martin Zweig approach, which is up 1,463.6% cumulatively. It replaces last year’s long-term winner, William O’Shaughnessy’s Tiny Titans approach, which plummeted 79.8% year-to-date.
Martin Zweig is professor-turned-newsletter writer and money manager. Our interpretation of his strategy is based upon his book “Martin Zweig’s Winning on Wall Street” (Warner Books, 1997), in which he outlined how to identify companies with strong growth in earnings and sales, a reasonable price-earnings ratio given the company’s growth rate, insider buying (or at least an absence of heavy insider selling), and relatively strong price action.
This growth and value approach examines trends in both quarterly and annual sales and earnings growth, with an emphasis on consistent and strong results.
Zweig believes that a price-earnings ratio can be too high or too low. Like Piotroski, he feels that there are two types of companies with low price-earnings ratios—those that are experiencing financial difficulties and neglected companies.
The risks of investing in financially troubled firms, in Zweig’s opinion, are too great to justify the investment in them, since the risk of these firms going under overshadows any potential “value” in these stocks.
Neglected stocks, on the other hand, are ignored by the market and often exhibit extraordinary performance once discovered.
The price-earnings ratio constraints for the Zweig growth and value screen consist of a minimum level of 5.0 to avoid potentially troubled firms and a maximum level of 1.5 times the median price-earnings ratio of the entire Stock Investor database (to avoid overpriced firms).
The final element of the Zweig screen looks for companies exhibiting price momentum by requiring that any passing company outperform the S&P 500 over the last half-year.
The past year has been a sobering reminder that “up” is not the only direction in which the stock market moves. Furthermore, even the most diversified stock portfolios cannot protect investors from such broad-based market weakness.
Nevertheless, it is important to adequately diversify the stock holdings in your overall investment portfolio. When using stock screening to choose potential investment opportunities, it is not enough to merely pick those screening methodologies with the highest long-term returns. Instead, it is important to gain an understanding of the forces that influence a portfolio’s performance and how a strategy may perform during current and expected future economic conditions.
In addition, having selected one or more methodologies to use, investors should not automatically buy the stocks that pass a given screen. Screening is a multi-step process and the results of a screen should never be considered a “buy” or “recommended list.” It is important to consider various qualitative elements after running your quantitative screens. Such due diligence is needed in order to evaluate a stock to decide whether it is worthy of your investment dollars.
The AAII Stock Screens are based on relatively simple filters that are our interpretations of the investment approaches advocated by prominent investment professionals or are based on basic investment principles backed by academic research and real-world results. Examining the characteristics of an investment methodology reveals many of the practical problems you may run into when trying to develop your own disciplined investment approach.
Bear Survival: The Top Strategy's Stocks
When looking at the yearly and overall performance figures for the screening methodologies tracked on AAII.com, it is easy to forget that individual stocks contributed to the performance.
Joseph Piotroski’s low price-to-book approach to stock selection bucked the trend among the rest of the screening strategies and actually generated a gain for 2008. The Piotroski screen’s 32.6% gain through December 5, 2008, came during the first eight months of the year, while it held a concentrated portfolio of no more than four stocks. It then preserved those gains, as no companies passed the screens during the market landslide that took place in the last months of the year.
Which individual stocks contributed to the strategy’s overall return?
All told, only five companies were held in the Piotroski portfolio during the year, and none are household names. This is true to the Piotroski approach, which tends to turn up small-company stocks that investors tend to ignore. The companies passing the Piotroski screen in 2008 also did not garner any analyst attention.
Table 2 presents the stocks that passed the Piotroski screen in 2008, along with their cumulative performance while they were held in the portfolio and select current financial data. The criteria for passing the Piotroski screen are listed in the accompanying box.
With such a small set of companies, it is difficult to draw any meaningful conclusions as to any similarities they may have, except for the fact that they all had a low price-to-book-value ratio when they passed the Piotroski screen.
L.S. Starrett Company was the best-performing stock that passed the screen during 2008. The company is engaged in the business of manufacturing and selling over 5,000 industrial, professional and consumer products. Among the items produced are precision tools, electronic gauges, optical and vision measuring equipment, tape measures, levels, chalk products, squares, band saw blades, hole saws, hacksaw blades, jig saw blades, reciprocating saw blades, and industrial quality lubricants.
Its 40.7% gain in 2008 came while the stock was held over seven months—January, February, March, April, May, June, and August. The stock started the year losing almost 14% in January and then rebounded with its best monthly gain of 19.5% in February and turned in positive gains in every successive month it was held.
L.S. Starrett’s price-to-book-value-per-share ratio was 0.62 when it first passed the screen at the end of December 2007. Today, the ratio is even lower at 0.57, yet it now ranks in the 31st percentile of the entire Stock Investor database, missing the 20th percentile cut-off. Furthermore, the company was not able to improve its annual asset turnover or current ratio compared to the year prior—two financial strength requirements underlying the Piotroski screen.
Mad Catz Interactive was the other “big” winner among the Piotroski stocks in 2008, gaining 13.8% over the three months it was held in the portfolio. The company designs and markets accessories for video game platforms, personal computers, and, to a lesser extent, the iPod and other audio devices. Mad Catz’s products include video game, PC and audio accessories, such as control pads, steering wheels, joysticks, memory cards, video cables, light guns, flight sticks, dance pads, microphones, car adapters, carry cases, mice, keyboards and headsets. It also markets video game enhancement products and publishes video games.
The stock had a price-to-book-value ratio value of 0.84 when it first passed the Piotroski screen at the end of March, placing it in the 18th percentile of the Stock Investor database. Currently, it rests right on the 20th percentile cut-off point with a value of 0.41. However, the company currently fails several of the screen’s financial strength filters.
The biggest gain in Mad Catz’s stock price came in May, when it gained just over 14%. This rise in price drove the stock’s price-to-book-value ratio above the 20th percentile threshold, at which point it was sold. After losing over 19% in June, Mad Catz’s price-to-book-value ratio fell back to acceptable levels and was once again added to the portfolio for the month of July. After filing its annual report, however, the company violated several of the Piotroski screen’s financial strength filters and Mad Catz was sold at the end of July.
Blonder Tongue Labs was the worst performer among the stocks passing the Piotroski screen in 2008, losing 17.7% for the four months it was held in the portfolio. The company designs and manufactures products for the cable television industry and provides integrated network solutions to the multi-dwelling unit, lodging/hospitality, and institutional cable markets.
Blonder Tongue shares slid almost 24% in January only to rebound with a gain of 27.7% in February—giving the company the distinction of having the best and worst one-month performance for all the companies that passed the Piotroski screen during 2008.
Currently, no companies passed the Piotroski screen as of the end of November.
The Piotroski screen has produced a hypothetical portfolio with impressive returns, given this year’s overall market performance. It achieved this with a small-cap value portfolio consisting of neglected stocks most investors wouldn’t otherwise run across.
The screen’s stringent financial strength filters also allowed the strategy to stay out of the market over the last four months.
|Company (Exchange: Ticker)||
|L.S. Starrett Co. (N: SCX)||40.7||7||9.4||0.6||0.4||34.6||104.9||40||Misc. Capital Goods|
|Mad Catz Interactive (A: MCZ)||13.8||3||28.0||0.4||0.2||14.9||15.4||-59||Computer Peripherals|
|Superior Uniform Group. (M: SGC)||0.4||3||11.8||0.8||0.5||-4.9||53.9||32||Apparel/Accessories|
|Spherion Corp. (N: SFN)||-11.0||2||3.6||0.2||0.0||16.4||72.1||-71||Business Services|
|Blonder Tongue Labs (A: BDR)||-17.7||4||nmf||0.3||0.2||-58.5||5.6||-14||Communications Equip|
|*Individual months, not successive.|
|Data as of 12/5/2008.|
|Exchange Key: A=American Stock Exchange; M=NASDAQ; N=New York Stock Exchange.|
What It Takes: The Piotroski Price-to-Book Screen
- The price-to-book ratio ranks in the lowest 20% of the entire stock universe
- The stock does not trade on the over-the-counter exchange
- The return on assets for the last fiscal year is positive
- Cash from operations for the last fiscal year is positive
- The return-on-assets ratio for the last fiscal year is greater than the return-on-assets ratio for the fiscal year two years ago
- Cash from operations for the last fiscal year is greater than income after taxes for the last fiscal year
- The long-term debt-to-assets ratio for the last fiscal year is less than the long-term debt-to-assets ratio for the fiscal year two years ago
- The current ratio for the last fiscal year is greater than the current ratio for the fiscal year two years ago
- The average number of shares outstanding for the last fiscal year is less than or equal to the average number of shares outstanding for the fiscal year two years ago
- The gross margin for the last fiscal year is greater than the gross margin for the fiscal year two years ago
- The asset turnover for the last fiscal year is greater than the asset turnover for the fiscal year two years ago