Choosing stocks worth buying is never easy, which is why I created a number of computerized strategies that are based on how some of Wall Street's finest gurus say one should pick stocks. One is modeled on the writings of a market guru who you have likely never heard of: Joseph Piotroski. Since I began following his strategy in 2004, the Piotroski strategy is up 124.6%, based on its 20-stock optimal annual rebalancing period, v. the S&P 500's 43.8% for the same period. This is an out-performance worthy of every investor's attention.
In 2000, Piotroski, a Stanford University accounting professor, published a study laying out an accounting-based stock-selection/shorting method that produced a 23% average annual back-tested return from 1976 through 1996 -- more than double the S&P 500's gain for the same time period.
His methodology started by narrowing stock choices to those trading in the top 20% of the market, based on its book/market ratios (or, conversely, the bottom 20% of the market, based on price/book ratios). However, he also found that just buying low-price/book stocks does not produce excess returns in the long term. That's because many low-price/book companies trade at a discount. They deserve to. They're duds, with poor prospects.
But when he applied a series of additional tests of financial strength to these low-price/book stocks, he was able to separate the duds from the potential champs. The variables he examined included a return on assets, current ratio, cash flows from operations, change in gross margins and change in asset turnover.
If you have never paid much attention to Piotroski's strategy, now might be the time. Here are three stocks in which the strategy ranks very highly:
LG Display (LPL): This company manufacturers display panels used in televisions, computers and mobile devices. The company passes all of the tests, based on Piotroski's strategy.
Nobel (NE): An offshore drilling contractor for the oil and gas industries, Nobel has to be considered a risky bet, given the struggles faced by the oil and gas industries. However, the Piotroski strategy finds a lot to like about this company, so if you are a risk taker, give Nobel a close look.
KT (KT): A telecommunications provider, KT is South Korea's largest fixed-line telecom operator and broadband provider. It is also the second-largest wireless operator. Like LG and Nobel, the Piotroski strategy likes this stock a lot.
All of these stocks meet or beat the Piotroski strategy's minimum requirements. In fact, they all earn its highest recommendation. These are stocks which can find a profitable spot in many an investor's portfolio.