Interpreting the Rankings Report

A sample PowerStocks JSE Ranking Report appears below. We will go briefly through how to interpret it before showing you how to build a portfolio. Click on the image for a larger view.



Going from left to right on the headings at the top:

1. Rank, JSE Ticker code, Share name, industry, price at trough
2. P1 to P9 are Piotroski sub-scores
3. TOT = Piotroski overall "F" score (Financial robustness)
4. MCAP = market capitalisation at trough price
5. Trade/day = Average trades per day for last 30 days (liquidity)
6. PE = Price-to-Earnings ratio in trough
7. P2Bk = Price-to-Book Ratio in trough
8. DE = Debt-to-Equity Ratio
9. DY = Dividend Yield
10. GR = positive & growing earnings per share in last financials

The PowerStocks ValuScore is then displayed:

1. "F" score for Piotroski (inclusive of bonus point)
2. "P/E" score for PE ratio
3. "P2B" score for price:book value (inclusive of bonus point)
4. TOT is total ValuScore

Shares are then grouped into ValueFinders, PriceFinders(a) and (b), Piotroski Universe etc. These are the PowerStocks Screens whose performance was discussed HERE.

You may elect to exclude small-cap and/or illiquid stocks from your portfolio (these are the grey-shaded shares but bear in mind we have shown that these contribute quite a bit to overall growth over 5 years).

You may also elect to use the DE, GR and EY fields to further apply selection criteria. Buffet, apart from using the techniques we have described on this blogsite, also avoided highly indebted stocks (DE>40%) in a downturn and focussed on high dividend yielding (DY) stocks that were showing EPS growth (GR). Note that our research has shown that eliminating these stocks significantly downgraded the performance of the portfolios (ie they had no negative bearing on ultimate growth achieved by portfolio inclusion).

It is recommended that you focus your attentions on the PowerStocks GrowthFinders, which are shares with ValueScores of 5 and 6 as these have shown to be the top performing portfolios. However, should you eliminate stocks that are small-cap or illiquid, or have debt:equity rations above 40% or have low dividend yields you will land up with a much smaller portfolio which may not be a good idea as ideal portfolio size should be at least 10 stocks. It is then suggested you consider stocks with ValuScores of 4 as well (essentially a PriceFinder(b) portfolio) as these have shown to perform nicely in the first 3 years of the recovery.

From the table you can see that if you focus only on larger cap, liquid issues we only have 7 shares in ValueFinder and 8 shares in GrowthFinder(b). We think you are better off either including all the small-cap/illiquid stocks (making 18 stocks in total) or including shares with ValueScore of 4 (making 13 stocks in total) to get to a better sized diversified portfolio.

NEXT UP : HOW TO SIZE YOUR PORTFOLIO ALLOCATIONS

ValuScore Performance

When we first introduced the PowerStocks ValuScore, we showed that small portfolios of JSE shares with scores of six (4 shares) and five (9 shares) significantly outperformed all other stocks on average, over a 5 year period. The graph below illustrates this performance on an accumulative basis:


Notice how the portfolios of shares with scores of 5 and 6 really "powered" ahead from year 3. These were real "PowerStocks"! Also notice how from year one already, the PowerStocks were already pulling ahead of the rest of the pack, and stayed ahead of the pack for the entire 5 year bull market! In fact shares with ValuScores of four (12 in total) were the only other group of companies that kept pace with the PowerStocks in the initial 3 year period. This is illustrated below:


The above graph also shows us that the PowerStocks (and the "4" stocks) almost doubled the average growth of the whole market in years one, two and three. Also note how remarkably quick the recovery of the PowerStocks were, coming out of the bear market. They doubled in year one and by year two had grown by 240% versus the group average of 120%. This is promising as it means we may not have to sit forever to realise our gains.

The reason for this is by design - PowerStocks, when bought at the trough of a bear market are:

1. very undervalued/oversold compared to the rest of the market
2. are cheap in relation to their per-share earnings power
3. are financialy strong (enough to survive economic slowdowns)
4. have the highest statistical probability of superior price growth

Remember, this is not some concocted methodology we have devised. It is based on accepted and proven principles used by the greatest value investors of all time (including Warren Buffet) for the last 100 years. All we have done is prove and tweak them for the JSE, added some automation to the financial analysis (Piotroski) and devised a nifty scoring system to help you screen and build up portfolios of stocks. For your initial portfolios to capitalise on the new bull market, we feel that stocks of ValuScores of 6, 5 and 4 should be selected for the first 3 years as this will offer a portfolio of suffcient size (15-25 stocks) and appropriate diversification.

To get a list of all JSE stocks together with their current ValuScores (as at 29 October, still our current "bottom pick" for the 2008 bear market) go HERE.

JSE Rankings Report

We would like to pay the bills for the tools and books we use for our research, so we are offering the first PowerStocks JSE Rankings Report for sale for R249.00.



This report will list all 420 JSE/ALT-X shares together with their Piotroski scores (and 9 sub-scores), as at 29 October (our pick of the bottom of this current bear market) together with the PE, Price:Book, Debt:Equity, Earnings yield and PowerStocks ValuScore.

The report is categorised and ranked into the following sections:

1. GrowthFinders (Piotroski >6 AND Price:NAV less than 1)
2. ValueFinders (Piotroski >6, AND Price:Nav less than 1 AND PE 2-6)
3. TurboStocks (Piotroski >6 AND PE=2 to 6, but Price:Nav >1)
4. PriceFinders (Piotroski less than 7 AND Price:NAV less than 1 AND PE=2-6)
5. Piotroski Vanillas (Piotroski >6 but PE > 6 and Price:NAV >1)
6. Undervalued (Piotroski less than 7 AND Price:NAV less than 1)
7. Cheap issues (Piotroski less than 7 AND Price:Earnings from 2 to 6)
8. Borderline (Piotroski of 5 or 6 but PE > 6 and Price:Nav > 1)
9. Dogs of the JSE (Piotroski less than 5 and PE > 6 AND Price:Nav >1)

Each category above is ranked according to Piotroski score, PowerStocks ValuScore, Market Capitalisation and average trades made per day (liquidity). This web site has described categories 1 to 7 in detail and how powerful they could be in selecting value stocks. The report is the first comprehensive ranking we have seen in South Africa of the JSE and ALT-X using fundamental data that historically showed the greatest correlation to share growth since the last big JSE crash.

The report will serve as a useful reference guide to any private or institutional investor. A sample from the top page of the report appears below (click for details).


The report highlights stocks in yellow that Graham, Buffet and other grand master investors would be picking right now according to their methodologies, namely liquid, as large cap as possible with low PE and Price:Book and sound financials, low debt/gearing and high dividend yields. It even recommends what % of your portfolio each share should constitute. The idea is you buy the yellow stocks, sit back for 5 years and reap the rewards!

Go here for instructions on how to interpret and use the JSE Rankings Report.

Email powerstockz(at)gmail.com with your name and address and we will email you an order form together with our bank details for an EFT.

PowerStocks ValuScore

In the previous section we saw how various fundamental screens and combinations thereof could narrow down a JSE portfolio candidate list whilst dramatically enhancing growth performance of said portfolios. The effectiveness of the various screens when performed on the 2003 crash can be summarised in the below graph:


*Note in the above graph we have not limited the PE screens to "liquid issues" only as this significantly reduces performance of any screens using PE.

At PowerStocks, we have derived a scoring method called the "ValuScore" to indicate how much "intrinsic value and growth probability" a share is exhibiting. This scores shares according to their PE, Price:Book and Piotroski "F" scores, and takes the effectiveness of the various screens and combos into account when performing the scoring. The effect is to significantly boosts historical ValueFinder portfolio performance (from 1,470% to 1,750% in the 2003 excersise) whilst dropping portfolio size by a staggering two-thirds! The scoring system is out of a maximum of 6 points and works as follows:

1. Start with zero score
2. Allocate 1 point if Piotroski "F" score is equal to 7
3. Allocate 2 points if "F" score is greater than 7
4. Add bonus point if "F" > 6 and Price:Book less than 1
5. Add 1 point if P/E between 2 and 6
6. Add 1 point if Price:Book less than 1
7. Add bonus point if Price:Book less than 0.7

Below is a chart showing how stocks in the April 2003 bear market grew in the subsequent 5 years versus the PowerStocks ValuScores they achieved in the trough:

We can see that portfolio performance was significantly enhanced and in fact collapses all 7 of the high performing screens shown in the previous chart to just two categories, namely "ValuScore 6" and "ValuScore 5" (13 shares in total).

Although the 5-year growth above hints that scores of 5 and 6 perform the best, we see that scores of 4 also perform well in the initial 3 year period shown below:

We will use this scoring system in our rankings tables and it is recommended that portfolios be built using shares with PowerStocks Scores of 5 and 6 and even with 4. Shares with a score of 3 perform on average slightly above the market whilst scores of 2 on average perform at market growth whilst scores of 1 and 0 perform on average below market.

NEXT UP : PowerStocks ValueScore Performance on the JSE