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Have you heard of this stock screener?

Apr 5, 2013

Stock screens basically help investors in short listing stocks. And given that there are more than 5,000 stocks listed on the BSE they are a useful tool for investors to cut down the list to manageable levels. The Stock screeners can also be custom designed. For instance, if one wants to have a look at the best dividend yield stocks one can build a screener for such companies. Along such lines, one can have screeners of companies with minimal debt or which have cash greater than their market capitalization etc. Thus, screeners offer flexibility. As such, one can use any metric of his choice and build his own custom screener.

In this article, we look at one specific screener that is quite comprehensive but is not widely known. We are talking about the Piotroski Score screener. The Piotroski screener takes into account nine ratios and then adds up their value (based on a score assigned to each ratio) to find the best value stocks. If the ratios meet the criteria of the screener one point is given for each ratio or else none.

Here are the nine ratios and their criteria that are taken into consideration for arriving at the piotroski score.

  • If the company has generated positive net income in the current year it is given one point
  • If the company has generated positive operating cash flow (OCF) in the current year it is given one point
  • If RoA in the current year is greater than RoA in the previous year one point is awarded
  • If OCF is greater than net profits one point is awarded
  • If D/E in the current year is lower than previous year one point is awarded
  • If the current ratio is greater than the one prevailing in the previous year one point is awarded
  • If no new shares are issued in the previous year one point is awarded
  • If gross margin is greater than previous year one point is awarded
  • If the asset turnover is greater than the previous year one point is awarded
After we have the scores of the companies in consideration we add their total. Note that if the company does not meet the pre-decided criteria it is not awarded any point. For instance, if the RoA in FY12 is greater than RoA in FY11 one point is awarded, else zero. Then the scores are added and the company with the highest score is considered to be of best value.

Now, let us have a look as to how the Sensex companies stand with respect to this measure. It will help us understand practical use of the screener. Please note that for the purpose of our analysis we use EBITDA margin instead of gross margin as most companies do not report gross margins explicitly. Also, note that we have excluded banking and non-banking financial companies from our analysis since most of these ratios are not applicable to them. For instance, D/E is immaterial in banking sector. Also, most banks raise capital frequently to meet the capital adequacy requirements. Thus, they would score low on D/E and share issuance parameters. As such, we have excluded them.

Now let us have a look at the Piotroski score table on BSE-Sensex companies.

Piotroski Score Table of Sensex Companies
Name of the companyPositive RoA in CYPositive OCF in CYRoA CY > RoA PYOCF > NPD/E CY < DE PYCurrent Ratio CY > Current Ratio PYShares Issued in CYEBITDA margin CY > EBITDA margin PYAsset Turnover CY > Asset Turnover PYTotal
HUL1111111119
Cipla1111111119
Hero Moto Corp1111111119
DR Reddy1111011118
Coal India1111111018
Sun Pharma1111101118
ITC1110111118
Bajaj Auto1101111017
Reliance Industries Ltd1101111017
Jindal Steel1101111017
Infosys1110101117
Tata Motors1111110017
ONGC1111001016
Wipro1100111016
GAIL1101001015
Bharti Airtel1101011005
Sterlite Industries1101001015
Hindalco1111001005
BHEL1010001115
TCS1100101015
M&M1100011015
NTPC1101001015
Maruti1101001004
Tata Power0100011014
Tata Steel1101100004
Larsen & Toubro1000011003
Data Source: Ace Equity
Consolidated financials are taken into consideration while arriving at the score except for Hero Moto Corp.
CY= Current Year & PY= Previous year. OCF = operating cash flow. RoA= Return on Assets
. NP= Net Profits.
FY12 figures are compared with FY11 for the purpose of this analysis since FY13 figures are yet to be announced.

As can been seen from the above table HUL, Cipla and Hero Moto Corp have the highest possible score while L&T ranks lowest in the list. However, a word of caution is needed here. The score can vary widely depending upon the performance reported in the immediately preceding year that is being analyzed. Hence, if for some reason the company faced a difficult year (example:- Maruti in FY12) which is subject to the analysis, score would be lower. Thus, the score should not be viewed in isolation. The other macro-economic factors that affect the score must be taken into consideration while analyzing the final score.

Also, it should be noted that this is just a stock screener that helps us in selecting stocks. Thus, the stocks that rank higher are not the best buys. In fact, the stocks that rank high should be taken up for further analysis. Their valuations and fundamentals must be gauged in detail before investing in such stocks.

Jinesh Joshi

Jinesh Joshi (Research Analyst) holds a masters degree in Finance and has over 8 years of experience in tracking equities. He has a keen affinity for number-crunching and is often sought after for his valuable insights on financial modeling and valuations. He has a keen eye for spotting emerging growth opportunities across sectors and market caps. Jinesh contributes to our Megatrend investing service The India Letter.


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