Top Piotroski-Graham Long-Term Value Portfolio: 2022 Returns +13% With New 2023 Selections

Introduction

These selections continue as ongoing tests of value algorithms using two of the best fundamental value models in peer-reviewed financial literature with additional customized enhancements. The full 2023 schedule of portfolio selections, research analysis, and the 2023 forecast articles are available here:

Top Piotroski-Graham Long Term Value Portfolio: 2022 Returns +13.1% With New January 2023 Semi-Annual Selections

These top selections for January 2023 comprise the 23rd portfolio since 2017 formed to test the one-year buy/hold portfolios of the Joseph Piotroski Value algorithm that remains one of the best-performing value-based selection models in peer-reviewed financial research. The portfolios are now released 2 times per year with the latest articles:

• Top Piotroski-Graham Long Term Value Stocks: July 2022 Semi-Annual Selections
• Top Piotroski-Graham Long Term Value Stocks: January 2022 Semi-Annual Selections

The benefits to financial statement analysis are concentrated in small and medium-sized firms, companies with low share turnover, and firms with no analyst following, yet this superior performance is not dependent on purchasing firms with low share prices. A positive relationship between the sign of the initial historical information and both future firm performance and subsequent quarterly earnings announcement reactions suggests that the market initially underreacts to the historical information. ~ Joseph Piotroski

Retests of the Piotroski model continue to outperform all other top value algorithm models as recently shown in peer-reviewed financial literature according to Amor-Tapia, B. & Tascón, M.T. (2016). The selections offered here have been improved to include the Benjamin Graham enhancements and additional parameters described in the methods section below.

I am frequently asked, “How long are these selections good to hold?” Both Benjamin Graham and Joseph Piotroski developed their models for 2-year buy/hold periods. Numerous scholarly research studies, some referenced at the end of the article, have tested the algorithm results over 2-year periods with these models outperforming other peer reviewed value selection models. I track all portfolio results for more than 2 years and continue to see strong long term results for more than 3 years.

January 2022 Portfolio Returns

2022 delivered the worst half-year start to the stock market since 1970 and the worst full-year returns since 2008. Those who followed the Momentum Gauges to avoid record downturns further enhanced these portfolio returns.

Despite these large market downturns, the Piotroski-Graham enhanced value portfolios have a two-year weighted average return of +51.88% NOT including large dividends.

January Dividend Adjusted Returns vs. S&P 500

The Piotroski-Graham enhanced portfolio for January significantly outperformed the S&P 500 again this year. When including large dividends from the portfolio, the peak total returns reached +21.2% in November and ended the first-year measurement period up +13.1%.

Members have smartly asked me to delay selections until the Momentum Gauges turn positive again for the best results. Regrettably, I am not trying to time selections just for the best returns, but focused on consistent release and testing of these portfolios through the worst market conditions. Rather, I would suggest you consider making your own entry timing using Momentum Gauges when they turn strongly positive again.

January 2023: Piotroski/Graham Value Enhanced Selections

These new selections have the highest Piotroski F-Scores of all the stocks screened across the US markets with a share price above $3 and average daily volume over 100k shares. In addition, the Benjamin Graham enhancements have been applied on the basis that these characteristics are well documented to deliver excess annual market returns.

These stocks meet the qualifying price/Graham number values less than one and even better value score less than 0.50. According to historical long term results, these stocks have very high investment value from oversold levels that should deliver strong long term gains. Additionally, none of these stocks had any red-flags from the Beneish M-Score forensic algorithm that checks for earnings manipulation or financial irregularities:

Overall Scores Independent of the Piotroski-Graham Algorithms

An independent ranking of these firms using other value and growth scores is shown below that may provide additional insight into the risk of these firms.

The 10 stocks belong to the following sectors: 1 Basic Materials, 1 Energy, 1 Consumer Cyclical, 4 Industrials, 1 Real Estate, and 2 Financial sector stock. These stocks and sectors show strong potential into 2023 from a sampling of highly undervalued stocks from more than 7,500+ stocks.

Ally Financial Inc. (ALLY)

Honda Motor Co. Ltd. (HMC)

SilverBow Resources, Inc. (SBOW)

Review of July 2022: Piotroski/Graham Value Enhanced Selections

This review provides an updated screen on valuations of the nine stocks from the prior midyear July 2022 Piotroski-Graham selections with today’s values. China petroleum was delisted shortly after selection reducing the portfolio to nine stocks. You can use this information to rebalance and restructure your prior long term buy/hold value portfolios.

The top gainers so far from July are Resolute Forest Products (RFP) +69.20%, United States Steel Corp (X) +39.87%, ArcelorMittal (MT) +16.02%, and Tri Pointe Homes (TPH) +10.20%.

July 2022 mid-year returns to date

The July dividend adjusted returns peaked at +18.64% in August and are up +3.1% compared to the S&P 500 +2.3% over the past six months.

Introduction to Piotroski F-Score Methodology

This article continues the series of testing the best value investment research over a one-year time horizon for well-documented and substantial value-investing returns. This study is testing the Piotroski F-score model to see how many of the different value portfolios formed each month can outperform the market over a year-long period.

These Piotroski value selections are designed as a more stable, long-term investment approach to identify highly oversold stocks, in contrast to the Weekly Breakout Forecast based on highly volatile, short-term momentum stocks. The value selection formulas have been well-documented in the financial literature over the past 17 years to consistently outperform benchmark indexes.

• The Piotroski stock selections above build on the findings from the Amor-Tapia & Tascon (2016) research that evaluates top selection models in more detail in the initial August report that found the Piotroski model to be one of the best models tested for value investment selections.

• The American Association of Individual Investors also documents their own multi-year test results of the Piotroski F-score as one of the best-performing models with 17-year annualized total returns of 14.4%.

• The V&M Breakout Enhanced Piotroski portfolios combining Graham parameters and my additional liquidity price/volume limits consistently outperform the AAII Benchmark Piotroski portfolios that produced -24.2% in 2022, +20.3% in 2021, +0.3% in 2020, -19.1% in 2019, and -36.1% in 2018.

The values and methodologies from Joseph Piotroski and Benjamin Graham were devised for long-term value approaches that differ significantly from growth or momentum strategies. Like many models, they can cycle in/out of favor as economic conditions and markets change. The benefit of the inclusion of the different types of models that I offer is to identify when these larger cycles begin to shift and readers can reap significant gains from changing models. Additionally, there has been no other value strategy yet tested in the financial literature that has beaten the Piotroski approach in all the peer-reviewed studies over competitive 1-year tests.

Cycles can shift dramatically as shown on the S&P 500 (SPY) ETF and this is another important reason for following the Momentum Gauges® closely:

• Momentum Gauge Topping Signal: 4th Negative Signal In 2022

Background on Value Scoring Systems

Calculating scores and assigning values to stocks based on fundamental data remain one of the most popular methods for value stock investing. Most of us are familiar with such scoring systems as the Value Line Rank (started in 1965), the CANSLIM composite ranking system (started in 1988), the Zacks Rank (started in 1982, first made public in 1992), and many other popular systems that have given us good results over the years. To this day, it is not uncommon to find substantial overlap among the best stocks identified by different value ranking methodologies. Most medium- to long-term investors are well served by taking these models into consideration.

Less well-known are the academic composite value models based on fundamentals that continue to be rigorously tested in peer-reviewed financial literature. Some of these published models have their measurement scoring integrated into publicly available stock screens from various stock analysis websites. One of the best academic models retested recently by Amor-Tapia and Tascon (2016) is the Piotroski score model created by Joseph Piotroski in 2000:

The Piotroski (2000) FSCORE: The Score consists of aggregating nine individual binary signals derived from accounting variables related to profitability. The most favorable value score is 9 and the least favorable is zero.

The Graham Number: Benjamin Graham, often called “the Father of Value Investing,” first leveraged key financial ratios to identify undervalued companies with strong growth potential. The Graham Number value score results from a formula developed by Benjamin Graham that is based on his assessment that good value stocks should have a P/E ratio below 15 and a P/B ratio below 1.5:

This Graham Number value equals the square root of 22.5 x EPS x P/B. Because it leaves out many other important characteristics it is better applied as an enhancement to the highly successful Piotroski F-Score value selection model.

Conclusion

The Piotroski F-Score model has been well-documented in the financial literature and by practitioners to generate significant excess returns on an annual basis. In addition, the enhanced value model selections above also eliminate financial outliers and low-priced stocks that may jeopardize the best performance results possible. This value model remains one of the top selection models among dozens also tracked by the American Association of Individual Investors. The advantage of this model is described by Joseph Piotroski from his published research:

First, value stocks tend to be neglected. As a group, these companies are thinly followed by the analyst community and are plagued by low levels of investor interest. Given this lack of coverage, analyst forecasts and stock recommendations are unavailable for these firms.

Second, these firms have limited access to most “informal” information dissemination channels and their voluntary disclosures may not be viewed as credible given their poor recent performance. Therefore, financial statements represent the most reliable and most accessible source of information about these firms.

Third, high BM firms tend to be “financially distressed”; as a result, the valuation of these firms focuses on accounting fundamentals such as leverage, liquidity, profitability trends, and cash flow adequacy. These fundamental characteristics are most readily obtained from historical financial statements. ~ Joseph Piotroski

Since my testing began of this Enhanced Piotroski-Graham value model, it has consistently outperformed the S&P 500 and benchmark AAII Piotroski selection models every year.

The majority of the portfolios I offer in my service are long term value portfolios, even though much more attention is given to the weekly MDA breakouts and ETF portfolios that are also significantly beating the S&P 500 again this year.

As we see more rotation into value stocks again, I trust this will be a profitable contribution to your investment objectives in 2023!

JD Henning, PhD, MBA, CFE, CAMS

References

Amor-Tapia, B. & Tascón, M.T. (2016). Separating winners from losers: Composite indicators based on fundamentals in the European context *. Finance a Uver,66(1), 70-94.

Piotroski, J. D. (2000). Value investing: The use of historical financial statement information to separate winners from losers. Journal of Accounting Research, 38, 1-41.

Graham, B. (1949). The Intelligent Investor: The Definitive Book on Value Investing

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.