Book Values: Piotroski's Picks

10/27/2014 9:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

If you haven't heard of Joseph Piotroski, you're not alone; he's probably the least well-known of the investment gurus who inspired my strategies, explains John Reese, editor of Validea.

Actually, Piotroski is not even a professional investor, but instead, an accountant and college professor. In 2000, however, Piotroski showed that you don't need to be a smooth-talking Wall Street hotshot to make it big in the market.

While teaching at the University of Chicago, he authored a research paper that showed how assessing stocks with simple accounting-based methods could produce excellent returns over the long haul.

No fancy formulas, no insider knowledge, just a straightforward assessment of a company's balance sheet.

His study turned quite a few heads on Wall Street. It focused on unpopular stocks whose book values were high compared to the value investors ascribed to them (their share price multiplied by their number of shares).

Quite often, such firms are in financial distress and investors wisely stay away from them. On certain occasions, however, high book/market firms may be great investment opportunities.

Through his research, Piotroski developed a methodology to separate the solid but overlooked high book/market firms from high book/market ratio firms that were in financial distress.

Since I started tracking it in late February 2004, the Piotroski-based model has been my most volatile strategy.  At times, it has been far ahead of the S&P 500, but right now, it's coming off a few rough years.

But keep in mind that back in 2010, after a couple of mediocre years, the deep value strategy roared back, gaining more than 55%, quadrupling the S&P.

Volatility is to be expected from a deep value strategy that often focuses on small-caps, so I really wouldn't be surprised if the Piotroski-model puts up some big bounce-back numbers over the next couple years.

It's also worth noting that when rebalanced annually, the Piotroski approach has been one of my best performers, producing 8.1% annualized returns versus 5.2% for the S&P.

Here’s a look at some of the stocks that currently earn a spot in this model portfolio:

Owens Corning (OC)
Transocean (RIG)
Vodafone Group Plc (VOD)
BHP Billiton Plc (BBL)
AGCO Corporation (AGCO)

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