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

It's no surprise that a retail clothing company made the list given the steep selloff in the sector. Jones Apparel (JNY Quote) made the cut with a Z-Score of 3.34 and a P-Scale reading of 7. The company sells brand-name clothing through its own stores as well as department stores and other retail outlets. The company has some of the premier women's clothing brands, including Anne Klein, Nine West and its own Jones of New York.

The stock is down about 60% from the highs and sells at 60% of book value. The company is restructuring to get rid of some lines -- it recently divested the unprofitable Barney New York stores -- and is buying back stock. The balance sheet is solid, with over $300 million in cash at the end of the quarter. I do not think retail apparel business will get better soon -- apparently company insiders agree, as there has been some selling of late -- but this is one to keep an eye on when the economy turns up and the consumer starts shopping again.

More aggressive investors with a better outlook for retail might want to look at the January 2009 combination trade. You can buy the stock here and sell the 17.50 calls and 12.50 puts for a combined premium of 3.10, a healthy 20%. Of course, should things get worse, you will have to buy stock below $12.50.

There are several more beaten and battered stocks that make the cut, but space doesn't really allow me to go through them all. I used these to give you an idea of the type of bargain stocks you can find and how I might trade them in this market. Although it is a little more work than buying the new-high list and praying for momentum , academic research and real-world experience show that this method pays off for patient investors with returns that solidly beat the market.

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To learn more about balance sheets, check out "Balance Sheets: The Good, the Bad and the In-Between."