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Piotroski F-Score Study: Specialty Retail Companies Offer Hot Buys

- By James Li

As of July, the Piotroski F-scores for Standard & Poor's 500 companies are normally distributed with a mean of 5.59 and a standard deviation of 1.44. Among specialty retail companies, Foot Locker Inc. (FL) and AutoZone Inc. (AZO) have the maximum F-score of 9. Since these stocks have many good signs, including high F-scores, many gurus invest major capital into specialty retail companies.

The Piotroski score and its distribution among S&P 500 companies

Associate accounting professor Joseph D. Piotroski discussed his nine-point metric in his 42-page research paper, "Value Investing: The Use of Historical Financial Information to Separate Winners from Losers." As mentioned in an earlier article, the Piotroski F-score produces a single financial score based on profitability and efficiency metrics computed using balance sheet data. Companies that have higher F-scores usually also have high profitability rankings, suggesting high upside potential in the short term.

The S&P 500 companies have Piotroski F-scores ranging from 2 to 9. Fifty-two percent of companies have F-scores between 5 and 6, scores that are typical for a stable company. As mentioned in his paper, Piotroski targets the companies with F-scores greater than 7: An investing strategy that focuses on companies whose Piotroski F-score is 8 or 9 outperformed the benchmark by 13.4% during the backtesting period from 1976 to 1996. Among S&P 500 companies, only 48 companies had an F-score of at least 8, representing just 9.68% of S&P 500 companies.

Gurus invest in strong footwear company

Incorporated in New York, retail company Foot Locker has a financial strength rating of 8 out of 10, suggesting a strong business operation with upside potential. Based on its Peter Lynch chart, Foot Locker is undervalued. Analysts who follow the New York footwear company expect the stock price to reach $87.30 by September 2019. With a Peter Lynch fair value of $78.72, higher than 75% of global footwear and accessories companies, Foot Locker has a margin of safety of 43.36%.


Historically, Foot Locker had increasing Altman Z and Piotroski F scores, suggesting that the footwear company's business operation strengthened throughout the 10-year period. The firm has healthy equity-to-asset ratios and interest coverage: currently, Foot Locker's equity-to-asset ratio and interest coverage outperform 73% and 71% of global footwear and accessories firms. With interest coverage of 86.18, Foot Locker has no trouble paying off its interest expense, implying little or no bankruptcy risk. Additionally, the firm has a high return on invested capital compared to its WACC.


As the company has high potential to create value, Jeremy Grantham (Trades, Portfolio), who owns 871,400 shares, increased his Foot Locker position by nearly 233% during the first quarter. Additionally, Scott Black (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and John Keeley (Trades, Portfolio) increased their Foot Locker positions by 14.42%, 30.27% and 117.04%.


AutoZone: modest financial strength but high profitability

While AutoZone also has a Piotroski F-score of 9, the automotive parts company has a weaker business outlook than does Foot Locker. AutoZone currently has a cash-to-debt ratio of just 0.04, suggesting that the company is generally unable to pay interest expense with cash. Furthermore, AutoZone's cash-to-debt ratio underperforms 96% of global specialty retail companies.


Unlike Foot Locker, AutoZone has had decreasing equity-to-asset ratios during the past 10 years, which usually implies increasing leverage. Additionally, AutoZone's equity dropped below zero during 2009 and decreased to its current low of -$1.7 billion. Negative equity implies that liabilities exceed assets, usually leading to bankruptcy.


The auto parts company has an Altman Z-score of 2.95, which is just under the "Safe" threshold. AutoZone historically had volatile Z-scores, which have generally decreased during the past 10 years. AutoZone's Z-score sharply decreased during 2007-2009 but dramatically increased in 2011 and in 2015. The Z-scores are more volatile based on quarterly data: As of May the calculations suggested that AutoZone is in distress.


Despite having a modest financial strength rating of 5, AutoZone has the maximum possible profitability rank of 10, implying strong upside potential. The auto parts company's operating margin outperforms 94% of global special retail companies. While the operating margins slightly contracted in the past two years, AutoZone's operating margin has generally expanded during the past 10 years. Additionally, the auto firm had increasing returns on assets and returns on invested capital. Unlike Foot Locker, which experienced negative ROA in 2009, AutoZone seldom had an ROA less than 12% during the past 10 years.


As the company has high profitability, many gurus increased their positions in AutoZone. Steven Cohen (Trades, Portfolio), who owns 187,900 shares, added 105.81% to his AutoZone position, resulting in a 0.59% portfolio increase. Joel Greenblatt (Trades, Portfolio) raised his AutoZone position fivefold, i.e., increased the position by about 400%.

Piotroski and the All-in-One Guru Screener

As mentioned in an earlier article, Piotroski's investment strategy, buying companies with F-scores of at least 8 and short-selling companies with F-scores lower than 2, outperformed the market index by about 8% during 1976-1996. With the All-in-One Guru Screener, GuruFocus users can generate their customized "Piotroski F-score Screener" and find stocks with high F-scores and other good signs. A sample Piotroski Screener contains the following filters:

  • The company's Piotroski F-score is at least 8.
  • The financial strength rating is at least 7.
  • The company has at least three good signs.

Including Foot Locker, three other specialty retail companies - Medifast Inc. (MED), Steve Madden Ltd. (SHOO) and Express Inc. (EXPR) - meet all of the above criteria and thus become good buys according to Piotroski's investment strategy.

Additionally, users can backtest their screeners with the new "Backtesting" feature. Backtesting allows users to view the performance of a test portfolio with the selected criteria relative to the performance of the three U.S. market indices. Premium Plus members can backtest up to 10 years, while Premium members can only backtest up to three years.

Disclaimer: I currently do not own any stock discussed in this article.

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This article first appeared on GuruFocus.