Newsletter
May 26, 2007
Directing Your Thought Process
Market & Sector Review
The Joseph Piotroski Approach
Largest Changes In Raw Numbers (21 Days)
This Week's Economic Reports
Directing Your Thought Process
This Week By: Vic Johnson
"All achievements, whether in the business, intellectual, or spiritual world, are the result of definitely directed thought." - As A Man Thinketh
Have you ever heard the expression that most people spend more time planning their vacation than they do planning their lives? I would expand that expression by adding that most people spend more time "thinking" about their vacation than they do thinking about what's important in their life.
While rest and relaxation are a must in living a balanced life, it's not what we were created to do. After all, the Master Creator took his R&R on the seventh day, only after six days of "definitely directed thought."
Wallace D. Wattles wrote "There is no labor from which most people shrink as they do from that of sustained and consecutive thought; it is the hardest work in the world." And yet it is the first and primary labor of achievement.
Have you given some "definitely directed thought" to your life's purpose or your personal mission statement? Is it written down? Do you review it and think about it often? Is your life organized around your purpose and a set of goals that support that purpose? Are the actions you take everyday in harmony with your purpose?
Without purpose and goals - definitely directed thought - you are like the proverbial "ship without a rudder," wandering everywhere while going nowhere. There is power in your purpose and in your goals. It is the power that takes you over obstacles, the fuel that propels you toward the life you envision. As Bob Proctor says, "Purpose gives meaning to WHY you're doing what you're doing."
Market & Sector Review
The Joseph Piotroski Approach
Another screen that appears in our watch list for value stocks is based on the work of Joseph Piotroski.
Joseph Piotroski, an accounting professor at the University of Chicago, Graduate School of Business, undertook a study of low price-to-book value stocks to see if it's possible to establish some basic financial criteria to help separate the winners from the losers.
Piotroski devised a nine-step method for finding the best value candidates. The system rates stocks on financial strength and profitability. Piotroski reasoned that value-priced (low price/book ratio) stocks rating high in these categories would be the best performers. He found that value stocks receiving passing grades using his system outperformed a portfolio of all value-priced stocks by an impressive 7.5 percent per annum.
Each of his nine steps consists of a simple test. You give the stock one point if it passes and zero if it doesn't. Five points constitutes a passing grade, the higher the score the better.
Step #1
Positive Net Income: Net income, the bottom line after-tax profits, is the simplest measure of profitability. Companies with positive net income are, by definition, profitable. Add one point if the trailing twelve months (TTM) net income is positive, and zero if not.
Step #2
Positive Cash Flow: Cash flow is arguably a better profitability measure than net income. Cash flow measures the money that actually moved into or out of a firm's bank accounts. Net income results from a variety of subjective accounting decisions; such as how fast to depreciate assets. Add one point if the trailing twelve months (TTM) operating cash flow is positive.
Step #3
Earnings Quality: Many experts compare net income to operating cash flow to detect potential accounting shenanigans. Cash flow normally exceeds net income because depreciation and other non-cash expenses reduce income, but not cash flow. The reverse condition, when net income exceeds cash flow, signals possible accounting mischief. Award one point if the TTM operating cash flow exceeds the TTM net income.
Step #4
Decreasing Debt: Piotroski rewards companies that are reducing their debt levels. He uses "financial leverage," which is total debt divided by its total assets, to quantify debt. Award one point if the most recent annual figure is less than the year-ago value.
Step #5
Increasing Working Capital: Working capital, the difference between current assets and current liabilities, measures the cash available to run the business. Piotroski prefers stocks with increasing working capital. Current ratio, which is current assets divided by current liabilities, is the usual metric for expressing working capital. Award one point if the most recent annual figure exceeds the year-earlier number.
Step #6
Improving Productivity: Piotroski uses asset turnover, which is revenues divided by total assets, to measure productivity (higher is better). Award one point if the most recent annual asset turnover exceeds the year-ago figure.
Step #7
Growing Profitability: In contrast to asset turnover, which gauges how well a firm employs its assets to generate sales, return on assets (ROA) measures overall profitability by comparing net income to total assets (net income divided by total assets). Award one point if the most recent annual ROA exceeds the year-ago figure.
Step #8
Issuing Stock: Piotroski prefers companies that do not need to issue more stock to raise capital or to fund acquisitions. Award one point if the most recent number of total shares outstanding is equal to, or less than, the year-ago figure.
Step #9
Competitive Position: Increasing competition often forces companies to cut prices, and hence profit margins, to maintain sales. Conversely, rising profit margins may signal can an improving competitive position. Piotroski uses gross margin, the profit a firm makes before considering overhead, to gauge the competitive environment. Hoover's Financials report lists the gross margins. Award one point if the most recent quarter's gross margin (Gross Profit Margin) exceeds the year ago number.
The data for scoring your stocks against the Piotroski scoring system is readily available from sites such as MSN, Yahoo Finance, Hoovers, Morningstar, etc. One of the features of our watch lists is the fundamental data provided. Much of the data required for this screen is present in our watch list under the fundamental tab of the spreadsheet.
Piotroski's scoring system is effective and easy to use. But it doesn't know if a firm's CEO has been indicted for fraud, or if a competitor's new offering has rendered a firm's major product obsolete. You still have to do your due diligence.
Source: Harry Domash's Winning Investing Newsletter
Largest Changes In Raw Numbers (21 Days)
[ Reserved for supporting members, now posted in members area ]
This Week's Economic Reports
Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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