Let's face it -- analyzing stocks is a lot of work and takes a lot of time. You can eat up a lot of weekends digging through years of 10-Ks, plotting out growth rates, and trying to get a handle on competitive advantages. Fortunately, there are some tricks to help you breeze through your analysis and more quickly separate the attractive companies from the ugly ones.
The trick up your sleeve
The Piotroski Score is one such trick. Created by University of Chicago professor Joseph Piotroski, the score assigns one point for each of nine different criteria relating to profitability, balance-sheet health, and operating efficiency. Piotroski found that by buying stocks with a score of 8 or 9 and shorting those with a score of 0 or 1, an investor would have had 23% annual profits from 1976 to 1996, largely outpacing the Dow Jones Industrial Average (INDEX: ^DJI) during the same period.
Let's see what the Piotroski score is for Green Mountain Coffee Roasters (NAS: GMCR) and whether it indicates that you should buy, sell, or ignore the stock.
Return on assets: In almost all cases, we want to invest in companies with positive earnings. Give the company 1 point if it has positive net income for the past 12 months. Green Mountain passes this test.
Cash flow from operations: Similarly, we want to make sure those earnings are available to shareholders and aren't going out the window with inventory buildup and other cash flows. Give the company another point if it has positive cash flows from operations for the past 12 months. Green Mountain passes this test as well.
Change in ROA: A company can't improve profitability forever, but it gets another point if the return on assets, measured by net income divided by total assets, is higher this year than last year. Green Mountain fails this test. By comparison, Starbucks (NYS: SBUX) has doubled its return on assets in the past year, from 8% to 16%.
Accrual: It's much easier to use accounting shenanigans to make things look better with earnings than it is with cash flows. Give the company another point if the cash flows from operations are higher than net income. Green Mountain fails this test as well. Fellow coffee-slinger McDonald's (NYS: MCD) , on the other hand, appears healthier with higher cash flows than gimmick-prone earnings.
Leverage ratio: A company with low debt is generally healthier than one with higher debt, so give the company a point if its long-term debt to total assets ratio is lower this year than last. Green Mountain passes this one.
Liquidity ratio: Similarly, a high current ratio is also an indicator of health, so give the company a point if this year's current ratio is higher than last year's. Green Mountain passes this one, too.
Shares outstanding: An increasing share count can gradually dilute your position, so give the company a point if it didn't issue any new shares in the last year. Green Mountain fails this test, with 15% more shares now than a year ago. Coffee competitors McDonald's and Panera Bread (NAS: PNRA) , on the other hand, shrank their share counts by a little more than 2%.
Margin improvement: A company with rising margins is better able to control costs and generate strong demand for its products, so give the company a point if gross margins are higher this year than last. Green Mountain passes this test.
Turnover ratio: A high turnover ratio indicates business efficiency and strong demand. Give the company a point if sales divided by assets was higher this year than last. Green Mountain fails this one. None of its close competitors passes it, either, although Peet's Coffee (NAS: PEET) could almost pass with a rounding error.
The Foolish bottom line
Overall, Green Mountain gets a score of 5, which means it might not be worth buying but also isn't a good shorting candidate. However, some of Green Mountain's major competitors pick up points where it fails and might be worth looking into.
At the time thisarticle was published Fool contributorJacob Rocheholds no position in any of the companies mentioned. Check out his Motley Fool CAPS profile, read some of his otherarticles, or follow him onTwitter. The Motley Fool owns shares of Panera Bread and Starbucks.Motley Fool newsletter serviceshave recommended buying shares of McDonald's, Panera Bread, Starbucks, and Green Mountain Coffee Roasters, creating a lurking gator position in Green Mountain Coffee Roasters, and shorting Peet's Coffee & Tea. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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