The Best Piostroski Screen Combination
Piotroski Screener & Piotroski Spreadsheet
I currently have a Piotroski screener which I update weekly or so as well as a free Piotroski spreadsheet that makes use of the excellent SMF excel plugin.
I have gone through in detail the Piotroski criteria and backtested the results to see whether it really did achieve what the academic papers claim. My conclusion? It has resulted in outstanding performance.
While all my other value strategies did poorly in 2011, the Piotroski 2011 performance was very respectable at -1.3%.
Best Piotroski Screen Combination Test
The Piotroski score is a great mechanism for filtering stocks, but I want to see whether better results can be achieved. So I am going to share with you my test results of numerous combinations utilizing the 9 point scoring system derived by Piotroski. My goal is to try and nail down the best combination that will outperform the standard Piotroski screen.
I did something similar with Graham’s stock selection checklist. Graham originally had a 10 item checklist which I felt were not all necessary. By going through the list and eliminating criteria such as a stock having to be priced at 2/3 of NCAV, the modified screen turned out to be much better.
The Initial Test Filter
With 9 criteria, there are hundreds of possible combinations, but there is no way of testing each one.
In order to cut the time and labor, I back tested one criteria at a time against the past 5 years – from 2007 to 2011.
Then I sorted the criteria based on the return it made. If you look at the image below, criteria #6, the latest current ratio being greater than the prior year current ratio, performed the best.
But using a single criteria as a screen itself is too broad and results in far too many stocks in the final output.
The Best Piotroski Criteria Combination
Using the findings from above, I tried combinations such as the top three, top five, positive only, bottom three etc, but results were not what I expected. Thus, the process of elimination began.
Rather than wasting your time explaining every thought process, I’ll just dumb it down.
I started with the best two criteria as the foundation and added one criteria at a time. If the new combination beat the previous combination, I continued with the new combination. If not, then the criteria was eliminated and so on.
The combinations were back tested over a one year, 3 year, 5 year and 10 year period and then ranked. The lower the total rank, the better.
As you can see, the best combinations (#6,9,1) and (#6,7,1,2) both tied for first place. However, I am awarding combination (#6,9,1) first place as it protected the downside better in 2011.
The original Piostroki screen placed 10th place and is the only one that posted positive numbers across all time periods. Impressive indeed.
Speaking of impressive, click on the image below to download the best free investment checklist that will organize your thoughts and save you time.
In the end though, the best Piotroski combination is a very simple selection criteria which doesn’t resemble Piotroski at all.
- Current ratio should increase
- Decrease in shares outstanding compared to prior year
- Positive net income
The results adhere to the rule of keeping it simple.
20 Stocks for the Best Piotroski Screener Combination
(stock price is from Feb 12, 2011)
Disclosure
None
