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2 additional tests for picking stocks

Based on yesterday's Piotroski's 9-step tests, according to Harry Domash, 2 more tests are added:

#10) Total Liabilities/EBITDA: A gauge favoured by lenders, EBITDA measures a company's income before deducting for interest, taxes, depreciation, and amortization. Credit Analysts believe that EBITDA best measures a company's ability to service its debt. Lenders believe so strongly in this gauge that they often require debtor companies to maintain a specified total debt/EBITDA ratio. Failure to maintain the required ratio allows that lenders to call their loans, meaning that they want their money immediately, an action that can drive a company into bankruptcy. Of course, lenders would do that only as a last resort, since bankruptcy means that they'll end up collecting only a fraction of the money owed. Ratios of seven to eight, or higher, typically give lenders the option of calling the loans.

Credit analysts also consider the ratio a measure of a company's credit quality. Companies with ratios below 5 are considered investment quality, and these companies can borrow funds at lower rates than firms with higher ratios.

Analysts and lenders' reliance on the total debt/EBITDA ratio makes it more important than any other single factor, so I've given it more weight. Companies with investment quality ratios of 5 or lower get one point. Ratios above 5 and below 8 get zero. Ratios of 8 or above signal extreme danger, and I deduct a point.

I substituted total liabilities for total debt to ensure that the test considers all debt. Making that change does not significantly change the ratio values for most firms.

#11) Total Liabilities to Operating Cash Flow: I added this test to differentiate firms that generate significant cash flows compared to their liabilities (cash flow at least 25 percent of total liabilities) and are in little danger of insolvency as long as that condition persists. Add one point if the TL/OCF ratio is less than 4.

May be I should talk about the background of Piotroski's test. Piotroski is an accounting professor at the University of Chicago and in the early 1990s he had done a landmark study. He found that although the value portfolio outperformed the growth portfolio, it is not all the value stocks outperformed but just a few of them among the portfolio. More value stocks actually underperformed the market than outperformed. Piotroski wondered what's the relevance of a strategy that 'relies on the strong performance of a few firms, while tolerating the poor performance of many deteriorating companies'.

However, according to Mr Domash, these tests, even with the 2 tests he himself added, would break down when applied to very low-debt firms. Sometimes it gives failing scores to very strong companies that recently reported negative cash flow and earnings. So this detailed fiscal health exam should only be applied to high-debt firms (TL/E ratios of 0.5 or higher)

Reference: Fire Your Stock Analyst! Harry Domash, FT Prentice Hall, 2006, ISBN 0-13-935332-9

Piotroski's 9-step method of picking stocks

#1) Positive Net Income: Net income, the bottom line after-tax profits, is the simplest measure of profitability. Companies with positive net income are, by definition, profitable. You can use Morningstar’s Five-Year Financials report lists net income going back five years. Get there by selecting “5-Yr Financials” from the Financials dropdown menu. Add one point if the trailing twelve months (TTM) net income is positive, and zero if not.

#2) Positive Cash Flow: Cash flow is arguably a better profitability measure than net income. Cash flow measures the money that actually moved into or out of a firm’s bank accounts. By contrast, net income results from a variety of subjective accounting decisions, such as how fast to depreciate assets. Morningstar lists operating cash flow just a few lines below net income on the Five-Year Financials report. Add one point if the trailing twelve months (TTM) operating cash flow is positive.

#3) Earnings Quality: Many experts compare net income to operating cash flow to detect potential accounting shenanigans. Cash flow normally exceeds net income because depreciation and other non-cash expenses reduce income, but not cash flow. The reverse condition, when net income exceeds cash flow, signals possible accounting mischief. Award one point if the TTM operating cash flow exceeds the TTM net income.

#4) Decreasing Debt: Piotroski rewards companies that are reducing their debt levels. He uses “financial leverage,” which is total debt divided by its total assets, to quantify debt. You can find financial leverage on Morningstar by selecting Stock Grades on the Snapshot dropdown menu. Award one point if the most recent annual figure is less than the year-ago value.

#5) Increasing Working Capital: Working capital, the difference between current assets and current liabilities, measures the cash available to run the business. Piotroski prefers stocks with increasing working capital. Current ratio, which is current assets divided by current liabilities, is the usual metric for expressing working capital. Morningstar’s Stock Grades report displays the current ratio going back five years. Award one point if the most recent annual figure exceeds the year-earlier number.

#6) Improving Productivity: Piotroski uses asset turnover, which is revenues divided by total assets, to measure productivity (higher is better). You’ll find it the Profitability section of the Financial Grades report. Award one point if the most recent annual asset turnover exceeds the year-ago figure.

#7) Growing Profitability: In contrast to asset turnover, which gauges how well a firm employs its assets to generate sales, return on assets (ROA) measures overall profitability by comparing net income to total assets (net income divided by total assets). Morningstar lists ROA in the same section as asset turnover. Award one point if the most recent annual ROA exceeds the year-ago figure.

Switch to Hoover’s (www.hoovers.com) to obtain the data for the final two tests.

Switch to Hoover's
#8) Issuing Stock: Piotroski prefers companies that do not need to issue more stock to raise capital or to fund acquisitions. From Hoover’s homepage, enter the company name and then click on Financials. Award one point if the most recent number of total shares outstanding is equal to, or less than, the year-ago figure.

#9) Competitive Position: Increasing competition often forces companies to cut prices, and hence profit margins, to maintain sales. Conversely, rising profit margins may signal can an improving competitive position. Piotroski uses gross margin, the profit a firm makes before considering overhead, to gauge the competitive environment. Hoover’s Financials report lists the gross margins. Award one point if the most recent quarter’s gross margin (Gross Profit Margin) exceeds the year ago number.

http://www.winninginvesting.com/best_busted_stocks.htm

Lawyers might need to be jailed 'cos they are defending for the clients?

莫少平指出，中國律師多不願為刑事案辯護，是因為中國法治並不公平，加上中國一些刑法條文不清晰，以致律師在庭上為當事人辯護或蒐證時，往往成為被告。

The crucial part is the Criminal Law of the PRC:

第三百零六条　【辩护人、诉讼代理人毁灭证据、伪造证据、妨害作证罪】在刑事诉讼中，辩护人、诉讼代理人毁灭、伪造证据，帮助当事人毁灭、伪造证据，威胁、引诱证人违背事实改变证言或者作伪证的，处三年以下有期徒刑或者拘役；情节严重的，处三年以上七年以下有期徒刑。 辩护人、诉讼代理人提供、出示、引用的证人证言或者其他证据失实，不是有意伪造的，不属于伪造证据。 (http://law.chinalawinfo.com/newlaw2002/slc/SLC.asp?Db=chl&Gid=17010)

To read more about its 'application', we'd check this website. The story is quite interesting:

《律政之王》
http://www.yaabo.com/htm/4/1505/135109.html


內地維權律師未能赴港開會
(明報) 04月 21日 星期六 08:55PM

http://hk.news.yahoo.com/070421/12/25zy5.html

多位中國法律學者未能出席在香港舉行的一項有關中國維權律師境況的研討會。

由香港大學比較法及公法研究中心、中國維權律師關注組合辦的「中國維權律師與法治」研討會，今天在港大舉行。

中央社報道，主辦單位說，多位先前答應來港的中國法律學者突然不能與會。

原先應邀出席但臨時不能來港與會的中國學者包括中國律師協會刑事專業委員會主任田文昌、武漢大學法學院講師張萬洪、重慶周立太律師事務所主任周立太、中國政法大學法學院講師滕彪。

港大法律學院院長陳文敏致開幕辭時指出，研討會原本有六位中國法津學者專家答應參加的，但今天只有北京 維權律師莫少平及中國郵電大學文法經濟學院講師許志永與會。

對於兩人與會，陳文敏說：「他們真是鼓起了很大的勇氣才能到港。」

陳文敏說，日前接獲一名答應出席的中國法律學者來信指出，不能來港的原因，是因為中國當局認為這項研討會是由反共組織舉辦，因此受壓不能來港。

在會上，莫少平就「中國刑事辯護律師面對的危險與機會」主題發表演講。他表示，在中國當刑事辯護律師很危險，風險也大，加上沒有什麼利潤可言，很多律師都不願接手處理刑事案件，寧願選擇其他類型案件。

莫少平指出，中國律師多不願為刑事案辯護，是因為中國法治並不公平，加上中國一些刑法條文不清晰，以致律師在庭上為當事人辯護或蒐證時，往往成為被告。

莫少平特別建議中國當局廢除中國刑法第三零六條，以及成立律師協會，監管律師運作，這樣才能使中國走向法治，減少中國刑事辯護律師被判刑的機會。

中文大學亞太研究所中國法制研究計劃研究員王友金說，根據統計，目前約有五百名中國律師被當局囚禁或判刑。

他說：「在一個國家有這麼多律師被判刑是很恐怖的事情。」

他指出，中國有十三億人口，但截至二零零六年為止，刑事辯護律師只有十一萬八千人，與美國現有七十萬名律師比較，是小巫見大巫，也反映出中國民眾在遇到問題時，非常缺乏資源。

出席研討會的香港法律學者專家還有港大法律學院教授陳弘毅、中國維律師關注組主席兼立法會議員何俊仁、港大法律學院副教授傅華伶等。

此外，剛抵港的中國民運人士任畹町及香港前線召集人兼立法會議員劉慧卿等民主派人士約一百人，也出席了研討會。