If you're a stockholder and would like to the stock company to generate excess returns, how to make investment decisions then?. University of Chicago professor Joseph Piotroski introduced a simple method analysis. He back-tested his research by applying his strategy to stocks using data from 1976 to 1996, and he found that by focusing on the bottom dwellers, he could earn outsized returns. His research showed that during the 20-year period he was studying, his approach would have earned an annualized rate of return of 23%:
Some companies whose stocks have been beaten down by the market are destined to turn from pumpkins to princesses. How does one earn such lofty returns when focusing on stocks that the market doesn’t like? It’s quite simple: focus on companies that are basically solid, and filter out those that stink. You have to separate the wheat from the chaff, as they say, which is, not surprisingly, easier said than done. Further, cash from operations for the current fiscal year must be greater than net income for the current fiscal year, and the long-term debt (LTD) to assets ratio for the current fiscal year must be less than or equal to the previous fiscal year’s ratio. As an additional test of solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year (http://www.forbes.com/finance/2006/08/24/piotroski-brunswick-wyndham-in_jr_0825guruscreen_inl.html) No subscription required.
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