How to Find Value Stocks With the Z-Score and Piotroski Scale

The results were published in his research paper "Value Investing, Using Historical Financial Statement Information to Separate Winners from Losers." He found that the companies scoring highest on the model substantially outperformed the lower-ranking stocks and the market as a whole.

Tracking your credit score makes sense. Tracking the credit score for the stocks in your portfolio makes even more sense to me. Investors who are interested in long-term-value and distressed-stock investing will find these tools invaluable in selecting and managing a portfolio of stocks that are likely to rebound and outperform.

[Now] I will take a look at some stocks that pass the tests and offer opportunity in this confusing market.

Use Your Tools to Find Good Value

I have found that the Altman Z-Score and Piotroski scale help me avoid the distressed stocks that are truly distressed and unlikely to recover. I sat down with my laptop and calculator this morning and started searching for some stocks that passed muster on both scales and sold for less than book value. The idea is to find value stocks with rock solid balance sheets as well as decent prospects for recovery.

I looked for stocks that had at least 5 out of 9 on the Piotroski scale and a Z-Score of 3. The stocks mentioned here are far from a complete list, but they're an example of the types of bargains that can be found by screening for cheap stocks and then checking their credit scores.

My first stock uncovered is Integrated Device Technologies (IDTI Quote). IDTI has a healthy Z-Score of 5.7 and a Piotroski score of 5. The company is in the semiconductor business and has sold off sharply over the past year. It is off about 50% from its highs and at less than 90% of book value. The balance sheet is strong, with about 20% of the share price in cash and no debt.

The company's core business lines -- server memory and PC clocks -- have been weak lately, and the stock sells near a five-year low. In its last earnings report, the company lowered its expectation for the next quarter. The company is well positioned to survive the downturn and should do extremely well when the semiconductor business bottoms and begins to turn up, hopefully later this year.

The company is buying back stock in the open market and still has $130 million of stock to buy under its current authorized buyback plan. I like this stock for an economic recovery and have added it to my list of stocks to watch. The options are way too cheap to sell puts , but if you think the semiconductor stocks will rally this year, the 2009 January calls are a good bet.

The next stock is an old favorite, one I have owned off and on several times over the years. Helen of Troy (HELE Quote) has a solid Z-Score of 4.6 and a P-Scale rating of 6 out of 9. The company makes personal care items such as hair dryers and curlers as well as kitchen items.

The stock sells at 75% of book value and just 7 times earnings. The company has a good balance sheet with over $100 million in cash. Management is cutting lower-margin product lines; making drastic reductions in selling, general and administrative (SG&A) costs; and paying down debt. The retail environment will continue to be difficult, but the company is optimistic that it can grow sales modestly and boost margins going forward and continue to generate cash in 2008.

I like this stock and I respect management. I wish I had run these screens on Monday [Feb. 18], as the stock is up today [Feb. 22]. The May options are thinly traded, but if you can split the wide bid-ask spread, selling the May 15 puts should be rewarding; if the stock slips back toward $15, I would be an outright buyer of the shares.