A Useful Tool: The Pietroski F Score
Posted: December 24, 2019
It’s not hard to tell when a stock is cheap. But how can you tell if it’s timely?
One tool is the Pietroski F Score, devised by Joseph Pietroski, a professor of accounting at University of Chicago. It rates stocks on a nine-point scale, based on nine questions. A “yes” answer to any question earns one point.
- Does the company have a positive return on assets?
- Is the return on assets higher than it was a year ago?
- Is the company’s debt ratio (long-term debt as a percentage of assets) lower than it was a year ago?
- Is the company’s current ratio (current assets divided by current liabilities) higher than it was a year ago?
Here are five stocks that look attractive to me now based on the Pietroski criteria. Each of them scores eight on the nine-point scale.
ConocoPhillips Co. (COP), with headquarters in Houston, Texas, explores for, produces, transports and markets oil and gas. It has withstood the storm in the energy industry reasonably well.
The stock peaked near $80 in mid-2014, dropped to below $35 in late 2015, and now sits around $64. At nine times earnings, it appears cheap. Of 21 Wall Street analysts who follow it, 15 rate it a “buy.”
Homebuilders, in my judgment are coming back. In rough terms, housing starts are double the Great Recession level, but only a little over half the peak level of 2005-2006. Building permits are up lately, and mortgage rates remain nice and low.
Among the homebuilders, PulteGroup (PHM) stands out on its Pietroski score. Pulte is one of the largest homebuilders, and builds across an array of price points. Pulte shares go for 12 times recent earnings, and 10 times analysts’ estimates for next year.
Based in Wisconsin, Oshkosh makes aerial-lift trucks, fire engines, troop transport vehicles, concrete mixers and garbage trucks. It got walloped during the Great Recession, but has shown a profit in 14 of the past 15 years.
The stock has nearly doubled in the past five years, but I don’t feel that it has exhausted its potential. At 12 times earnings and 0.8 times revenue, I think it’s modestly priced.
If you believe that a recession lurks right around the corner, stay away from Oshkosh. Aerial-lift trucks and concrete mixers definitely have a cyclical quality about them. But if you believe, as I do, that a recession is at least a year away, this may be a good place to put your money.
Virtually unchanged in price the past five years, Tredegar largely missed the stock-market rally of the late Obama and early Trump years. Nonetheless, some smart investors, including Mario Gabelli and Chuck Royce, have been buying the stock in recent months.
The company, based in Richmond, Virginia, manufactures plastic films and aluminum extrusions. It has paid a dividend every quarter for about 40 years now, and recently increased its dividend by 9%. The dividend yield is about 2.2%.
Are protein shakes and nutrition bars your thing? You might be interested in BellRing Brands (BRBR), out of St. Louis, Missouri. This is a new company, spun out of Post Holdings, the cereal giant, in October. Its best-known brand is PowerBar.
The spinoff went well from the standpoint of early investors, who got a quick 18% gain, and not so well from the point of view of the company, which had hoped to raise about $570 million and instead raised about $480 million. Eleven analysts follow the fledgling company, and nine recommend it.
I’ve written about the Pietroski score twice before, in 2013 and 2014. When I wrote the first column, the American Association of Individual Investors (AAII) had just singled out Pietroski’s methodology as the best-performing stock-picking paradigm from 1998 through November 2013.
I must have jinxed it. The AAII’s F-score picks from December 2013 and December 2014 were down an average of 16.4% in 12 months, versus a positive total return on the Standard & Poor’s 500 Index of 7.1%.
Nonetheless, the method often does well. It notched an average 12-month return of 16.1% from 1998 through November 2019, according to AAII.
The AAII’s picks were all extremely small companies with a very low price-to-book ratio (stock price divided by corporate net worth per share). For today’s column, I made my own choices from a wider field.
Disclosure: I own Oshkosh shares for most of my clients and personally.
John Dorfman is chairman of Dorfman Value Investments LLC. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.