In 2000, while teaching at the University of Chicago Booth School of Business, Professor Joseph D. Piotroski introduced the F-Score model to pick stocks, outlining nine fundamental criteria for picking winning stocks by using historical financial information.
The F-Score examines a company’s profitability, leverage, liquidity and source of funds, and operating efficiency.
I used the F-Score to select a handful of stocks around this time last year. It’s time to check how that strategy worked in the Hong Kong market.
Can investors pick long winning stocks?
First we divided the Hang Seng Index constituent stocks into six groups based on their F-Score performance for fiscal year: those with a score of 3 or below, 4, 5, 6, 7 and 8 or above.
Then we bought stocks from these six groups in April or May and hold them until the same month next year, updating the portfolio based on the latest financial data.
Over the horizon of last 13 years, the group with the highest score of 8-9 should show the best performance.
Investors would see their investment of HK$100 reach more than HK$1,900 if they started buying in 2003. That’s an annual return of 25.5 percent.
That’s far above the return of other groups, as well as the Tracker Fund of Hong Kong, which had an annual return of 10.2 percent.
In the meantime, the group with the lowest score of 3 or below has had the worst performance, generating an annual return of 8.8 percent since 2003.
Nevertheless, those in the medium range have shown very mixed performance. That is to say that those with a score of 4 to 5 may not necessarily lag behind those with a score of 6 or 7 in terms of performance.
However, the group with the highest score and best financial fundamentals have failed to outperform in the last two years.
They only had a return of 19.6 percent in 2014, making them the worst among all groups, compared with a stunning 33.2 percent rise in the Tracker Fund.
As of last year, that group continued to lag behind and had the second worst performance.
The Hong Kong market showed a remarkable run-up to a peak of 28,588 points in late April last year, which has driven up the overall market, small-cap stocks in particular.
Stocks with strong fundamentals continued to fall in the second half of last year, which sort of distorted their performance.
Generally speaking, the F-Score approach can help investors screen some stocks with good fundamentals and save them a lot of time and effort.
Nevertheless, a high F-Score may not always translate into good investment returns, as we’ve seen in the last two years.
This article appeared in the Hong Kong Economic Journal on April 14.
Translation by Julie Zhu
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