Almost seven years ago SIPro introduced an F-score field in their database. It is based on the work of Joseph Piotroski of the University of Chicago. He found that while value stocks outperformed growth stocks a few outperformers skewed the portfolio returns. A majority of value stocks underperformed the market. Piotroski, an unusally practical sort for an academic, put together a financial scoring system to weed out the dogs that had a larger chance of underperforming, being delisted, going bankrupt, etc. High scoring companies in general are in better financial health.Up until now I have had little success in using the F-score in an MI screen. However, the key appears to be applying it to high-debt companies. Indeed, with this group one can produce both effective long and short screens. Not to mention a hedge with the highest CAGR that I've seen for a hedge.The high screen:Price > 10Volume > 20K/dTotal liabilities Q1 > 0.75 x Total Assets Q1F-score (12mon) > 5Sort high 26wkThe low screen:Price > 10Volume > 20K/dTotal liabilities Q1 > 0.75 x Total Assets Q1F-score (12mon) < 4Sort low 26wkHere are the results since 3/02 for a five-stock portfolio with a three-month hold: High Low Low as shortCAGR 24 -39 33GSD 39 64 45These are quite respectable CAGRs for a quarterly hold, especially since over the same period SPY would have given you -1/13. However, the GSD numbers are too high for comfort. The volatility can be cut in half if we hedge the High screen with the Low (as a short). High hedged with LowCAGR 34%GSD 20If one doesn't want to go to the trouble of shorting individual stocks, the hedge could be done with an ETF that is an inverse of SPY. Here the results are lower but with a much smoother ride. High hedged with SPY (short)CAGR 15%GSD 13RRR3 0.92So, what has it done for you lately? Here are the 2008 results for the High screen and the Low as a short:Start High Low Hedge08-01 - 5% 26% 10.5%08-02 2 39 20.508-03 13 25 1908-04 29 5 1708-05 23 30 26.508-06 1 36 18.508-07 -32 48 808-08 -39 45 3DB2
High Low Low as shortCAGR 24 -39 33GSD 39 64 45
High hedged with LowCAGR 34%GSD 20
High hedged with SPY (short)CAGR 15%GSD 13RRR3 0.92
Start High Low Hedge08-01 - 5% 26% 10.5%08-02 2 39 20.508-03 13 25 1908-04 29 5 1708-05 23 30 26.508-06 1 36 18.508-07 -32 48 808-08 -39 45 3
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |
BATS data provided in real-time. NYSE, NASDAQ and NYSEMKT data delayed 15 minutes.
Real-Time prices provided by BATS. Market data provided by Interactive Data.
Company fundamental data provided by Morningstar. Earnings Estimates, Analyst Ra