Little-Known Guru Generates Big Profits

In his latest article for Canada’s Globe and Mail, Validea CEO John Reese takes a look at the Guru Strategy he bases on the writings of Joseph Piotroski, a little-known accounting professor who authored an influential stock-picking paper.

“Mr. Piotroski’s approach started with a variable many investors had used before: the book-to-market ratio (the inverse of the price-to-book ratio),” writes Reese, whose 10-stock Piotroski-based portfolio is up about 10% in 2010 while the broader market is well in the red. “He targeted stocks that were in the top 20 per cent of the market based on their book-to-market ratio, meaning that the price investors ascribed to these companies was relatively low compared to the value of their hard assets.

“[But] while many investors had simply focused on high book-to-market (or low price-to-book) companies, Mr. Piotroski went a key step further, running high book-to-market stocks through a variety of accounting-based balance sheet tests. By doing so, he made sure that investors weren’t ignoring a high book-to-market stock for good reason (i.e., it was a dog, and everyone knew it).”

Reese discusses how his Piotroski-inspired method works, and offers a few picks from his model. To read the full article, click here.

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