Wes Gray’s Turnkey Analyst has a guest post from Paul Sepulveda in which Paul asks if it’s possible to improve net net returns by removing stocks with the highest risk of going to zero (the real losers).
Paul has an interesting approach:
My goal was to chop off the left tail of the distribution of returns. Piotroski uses his F-Score to achieve a similar goal among a universe of firms with low P/B (i.e., “value” firms). After collecting the data on recent net-net “cigar-butts”, I quickly realized something: about half of my list consisted of Chinese reverse-merger companies! These firms definitely had a decent shot of going to zero after shareholders realized Bernie Madoff was the CEO and Arthur Anderson was performing the audit work. I separated these companies from the remaining universe. For completeness, I also recorded market caps and Piotroski scores to create alternative net-net universes I could study.
Here are his results:
Paul has only six months of data, but the experiment is ongoing. He has some other interesting observations. See the rest of the post here.