Introduction
There are several methods to pick value stocks, for example FamaFrench model, Hagen model or Greenblatt model. Each model has its own merit and makes sense in its own way. In our last paper, we discussed if FamaFrench model is a good model both in sample and post sample. In this paper, we discuss the consistency between Greenblatt model and Piotroski screen method in picking excellent value stocks.
Data
We chose 30 stocks from magicformulainvesting.com which get the highest score in value stocks the website gives us. We download the fundamental data of each company from Bloomberg.
Methodology
First we use Greenblatt’s method to pick the best value stock. We calculate Return On Capital(ROC) using these formulas:
ROC = EBIT/(Net Working Capital + Net Fixed Assets)
In which,
Net Working Capital = Current Assets – Current Liabilities
Net Fixed Assets = Long Term Investment +Property Plant & Equipment
Then we calculate Enterprise Yield,
EY = EBIT/Enterprise Value
In which,
Enterprise Value = Market Capitalization of Equity + Debt – Cash
Then we rank the value of ROC and EY and take the sum of these two ranks, choose the lowest value as our stock pick.
Then we do a Piotroski screen.
Picking Stock
We choose 30 stocks from magicformula website, and rank all the stocks by scores.
We get a really high score on this stock by using Piotroski screen.
Conclusion
It is not surprised that we get such a high score on a stock picking by Greenblatt. Actually in my opinion Greenblatt’s method is basically similar to the Piotroski’s method. They both find stock by using financial statement analysis, so they both discover value stock rather than growth stock. Moreover, Greenblatt focused on two aspect of a company, operating efficiency and profitability, which are represented by return on capital and enterprise yield. Similarly, Piotroski keep these two aspects and add one more, financial performance. This could be a compensate to Greenblatt’s method. That is the reason why they pick identical stocks.
