Sixty-six bargain shares with corporate resilience

When Joseph Piotroski published 'Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers', the Stanford University accounting professor clearly wasn’t trying to win the award for the snappiest academic paper title of 2000.

Which is ironic. Because at its essence, his seminal study was concerned with whittling down the many cheaply valued stocks that go on to fulfil their low expectations.

Piotroski observed that while shares with lower price-to-book values (P/BV) often beat the market, returns from the strategy were overly reliant on a handful of bigger winners counterbalancing a lot of dross. Worse, most produced negative market-adjusted returns two years after their purchase. To correct for this, he devised a method to combine cheapness with measures of corporate resilience.

When backdated and applied in a long-short portfolio, Piotroski found that these nine measures – which produce what he termed the ‘F-Score’ – would have thumped the market, generating an average annual return of 23 per cent between 1976 and 1996.

Our F-Score Value Hunt screen, which launched a decade ago, adapts Piotroski’s methodology by keeping the F-Score, but substituting the focus on low P/BV ratios for other tests of cheapness. Because Piotroski found that his methodology was most successful when screening smaller and medium-sized companies, our version pays more attention to smaller UK share indices than most screens that appear in these pages.

Over the past 12 months, the screen handily beat its benchmark, which is a three-way average of the FTSE All-Share, All-Small and Aim All-Share indices. In the case of the All-Share and Aim screens, the level of alpha was in line with the long-term outperformance of the respective indices, although the All-Small value picks slightly lagged its benchmark despite putting in the strongest absolute performance. This isn’t a huge surprise: although the All-Small may be one of the best corners of the market from which to pick stocks (relative to all others), it sets a high hurdle to beat on its own.

This brings the screen’s cumulative return, based on annual reshuffles and equally weighted across all stocks selected, to 137 per cent since 2014. The combined return from the indices over the same period is now 66 per cent.

This headline return falls to a much more mediocre 104 per cent if we factor in annual charges of 1.5 per cent, to better reflect the theoretical cost of buying dozens of often very illiquid stocks every 12 months. Alas, even in the real world, such prices need to be baked into a value investor’s process, given that many of the names flagged by the screen aren’t of the quality ‘buy-and-hold’ variety.

As such – and even if we focus in on the market where we have had most absolute success (the All-Small screen) – we can’t claim to have had nearly as much success as Piotroski’s backdated study. In part, that’s because his paper looked at a different market, and a period in which the Russell 2000 Index more than quadrupled. So this is hardly an apples-with-apples comparison.

Performance stacks up more favourably when relevant comparisons are involved. According to AJ Bell and Morningstar, an 88.6 per cent total return qualified as average top quartile performance for UK-focused active fund managers over the past decade. And even our Aim screen beats that on a headline basis.

This year, the screen has highlighted a whopping 66 stocks across the three indices, 10 of which appear in both the FTSE All-Share and FTSE Small Cap screens. There appears to be a value playground out there in UK equity land. Like all screens in these pages, these are best thought of as a source of investing ideas, rather than a pre-made portfolio. Details of these stocks can be found in the table below, and in much greater depth in its downloadable version.