Saturday, January 8, 2011

Show me where the money will go, not where it has gone

The following is an abridged version of what Teh Hooi Ling wrote on her "show me the money" column. I have read her earlier article on the use of the Piotroski F-score and I think that beginners who can try to come up with such a scoring matrix, will make a positive step in improving their investing process.

Most of the companies that she has listed out as a result of using the F-score, are all very big companies. This will end up neglecting to include small cap stocks that have the potential for supernormal returns, volatility notwithstanding. That said, it is possible while during portfolio construction to use a separate screen altogether when allocating money for small caps. To be sure, Teh has written on how to select small cap stocks before.
In search of good long candidates (Link here)

The criteria would be a low price-to-sales ratio, a high Piotroski F-score and capital discipline

Here, he uses Joseph Piotroski's F-score. There are nine measures that relate to a company's profitability, the health of its balance sheet and its operating efficiency that one looks at to arrive at the F-score. The checklist is: positive net earnings; positive cash flow from operations; increasing return on assets (ROA); higher operating cash flow relative to net income; decreasing long-term debt as a proportion of total assets; increasing current ratio; stable or decreasing number of shares outstanding; increasing asset turnover; and increasing gross margins.

Every yes answer to the items on the check list gets a score of one, and no a zero. So companies with improving fundamentals will have higher F-scores (seven to nine), and those with deteriorating fundamentals will have low F-scores (below three).

Piotroski's strategy calls for buying a company with the requisite low price-to-book (P/B) ratio and an F-score of eight or nine. Piotroski's research shows that low P/B stocks with high rankings are less likely to go bankrupt or to fall drastically in price than those with low rankings. This provides a greater safety margin.

Mr Montier's final criterion is capital discipline. Companies that have grown their total assets by more than a double-digit percentage will pass through his short screen.

So for my 'buy' or 'long' list, I set it such that the companies should have a price-to-sales ratio of below 1.2 times, Piotroski F-score of more than seven and total asset growth of less than 20 per cent from a year ago.

At that time, the lone stock the screening process spat out was Singapore Petroleum Corp which was then being acquired by PetroChina.

I then relaxed a few of the criteria and the stocks which Bloomberg came up with and which I listed in my article then were: SembCorp Marine, Keppel Corp, Cosco, Venture, SembCorp Industries, Yangzijiang, Noble Group and Thai Beverage. 

Edit (added the new companies that were found from running the screen as of yesterday)

So the screening process proved pretty effective. Yesterday, I did the screening again. The lone stock which met all the above criteria, ie full F-scores of nine, trading below 1.2 times sales and below book, and registered less than 20 per cent increase in total assets over the past year, is Time Watch

And if I relaxed some of the criteria, the list expanded to include Spindex, GP Industries, PCA Tech, Chosen, Pertama, Beyonics and CFM Holdings. This time round, the list is made up of mostly small cap stocks. It seems the market recovery has lifted most if not all bigger cap stocks out of the 'cheap' zone.


  1. On the later part of the article, she mentioned conducting the screening recently which produces the following small cap stocks namely: Time watch, spindex, gp industries, pca tech, chosen, pertama, beyonics and cfm holdings.

  2. yup... i just realized that when i went through further down the article... those companies however appear only after even further relaxation of the screen...

  3. hey pika, i added the bit where she mentioned the smaller companies.

    thanks for the look out.


  4. Hi, do you mind sharing what stock screeners are available in Singapore? How did she screen for the piotroski criteria in Singapore?

  5. Melon,

    you can email her to ask. i have tried that before. Nonetheless, she probably used a bloomberg machine to key in the criteria she is looking for. she also possibly has a team of assistants to double check if the numbers are right.

    hope it helps