How Has Piotroski’s Formula Done Recently?

A reader asked: “How has Piotroski’s value formula fared over the five years since “Piotroski’s Efficient Value Investing”? This unglamorous type of idea seems to work best. Given the volatile times we’ve been through, it would be fascinating to see if the filter still works — as it was designed to maintain the higher average return from small value stocks whilst mitigating against the fact that many become worthless.”

Here are a couple of places you can investigate the recent performance of Joseph Piotroski’s formula for value investing:

The American Association of Individual Investors has back-tested and forward-tested the performance of specific strategies, including Piotroski’s formula, on a monthly basis since 1998. The Piotroski model there is among the top-performing strategies, but the associated portfolio is very small (just 5 stocks), and results therefore may not be very reliable. See “The AAII Stock Screens” for a review/extension of the AAII methodology.

Validea offers performance data for models of 12 guru strategies, including Piotroski’s formula, since early 2004. These models use small portfolios (10 stocks), so the reliability with which they reflect the guru strategies is limited. On an inception-to-date basis, the Piotroski model is not among the top-performing strategies.

There is not enough information on these sites to tell how precisely they follow Piotroski’s published rules. Neither source appears to account for trading frictions, which can substantially dent net return in performance calculations. It is reasonable to expect that real accounts employing similar stock selection methods will not do as well as the test data indicates.

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