Ever Thought Of Using A Fundamental Stop-Loss? by Tim du Toit, Quant Investing

Do you hate a price driven stop-loss system?

If you do you are most likely a hard core value investor, but here is a great alternative suggestion by a friend and long-term subscriber to the screener.

It will help you limit your losses if the underlying business of your investment starts to go downhill.

And best of all it needs little or no research.

Get The Full Warren Buffett Series in PDF

Get the entire 10-part series on Warren Buffett in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

Inspired by Warren Buffett

My friend said he got the idea from an article where Warren Buffett mentioned that he did not care what had happened to a company’s share price as long as operationally the company was still doing well.

Warren mentioned that he got this idea from Philip Fisher that only sold investments for operational reasons.

Quantitative fundamental stop-loss

So how can you easily find out if a company’s operations are deteriorating without doing a lot of research?

My friend does this by selling an investment if the company’s Piotroski F-Score falls below 5, replacing it with one of the best ideas from his favourite screen.

Piotroski F-Score summarized

The Piotroski F-Score is calculated with the use of the following 9 ratios:

Profitability

  1. Return on assets (ROA)
  2. Cash flow return on assets (CFROA)
  3. Change in return on assets
  4. Quality of earnings (accrual)
    Funding
  5. Change in gearing or leverage
  6. Change in working capital (liquidity)
  7. Change in shares in issue

Efficiency

  1. Change in gross margin
  2. Change in asset turnover

How the Piotroski F-Score is evaluated

Best or high Piotroski F-Score = 8 or 9

Worse or low Piotroski F-Score = 0 or 1

So you can see, from all the ratios above, the F-Score is an excellent way you can measure the fundamental quality of your investments.

You can read more about the Piotroski F-Score (including exactly how it is calculated) here: This academic can help you make better investment decisions – Piotroski F-Score.

How you can find the Piotroski F-Score

The screener is updated daily and updates the Piotroski F-Score every time a company posts results, including quarterly and half year results, so it’s really easy for you to keep track of what the Piotroski F-Score is of all the companies in your portfolio.

You simply call up the name of the company and you can immediately see the F-Score of the company.

In the image below I called up the F-Score of Microsoft.

Stop-Loss System

Find only good Piotroski F-Score companies

It is just as easy for you to only get investment ideas of companies with a healthy Piotroski F-Score.

In your favourite screener simply add Piotroski F-Score to your screening criteria and with the slider select only the ideas with a good Piotroski F-Score.

In the image below you will only select companies with a Piotroski F-Score from 6 to 9.

Stop-Loss System

Your fundamental stop-loss analyst

Tim du Toit