Understanding the Piotroski Score and Stock Target Price to Find Value Stocks

When it comes to investing in stocks, many people want to find companies that are undervalued by the market—often called “value stocks.” Two tools that can help you do this are the Piotroski score and the stock target price. By understanding these tools, you can make more informed decisions about which stocks to consider buying.

What is the Piotroski Score?

The Piotroski score is a number between 0 and 9 that measures a company's financial health. A professor named Joseph Piotroski came up with this score to help people find good, solid businesses that the market may have overlooked. The score is based on nine different factors taken from the company's financial statements—things like profitability, the strength of its balance sheet, and its ability to generate cash.

- A score of 8 or 9 is considered very strong, suggesting that the company's financials are in good shape.
- A score around 5 or 6 is average and might need closer inspection.
- A score of 1 or 2 means the company could be struggling, and you should be careful before investing.

It's worth understanding the nine distinct factors that drive the Piotroski score, as they cover a variety of areas in a company's financials. They include signs of improving profitability like higher returns on assets and stronger cash flows, as well as stability factors, such as decreasing levels of debt or increasing current ratios. Evaluating these components can help you see if a company is genuinely getting healthier, rather than just experiencing a short-term boost in sales or a temporary drop in expenses.

For example, an improvement in a company's cash flow from operations suggests that the firm's core business activities are becoming more efficient at generating cash. Similarly, a reduction in long-term debt can indicate that management is reducing risk and making the business more resilient to future economic downturns. Taken together, these points help confirm that a favorable Piotroski score isn't just a one-dimensional measure, but a holistic indicator of a company's underlying financial strength.

How to Access the Piotroski Score Online

If you're looking for an easy way to access the Piotroski score for various stocks, you can use the Financial Modeling Prep (FMP) API. FMP provides an endpoint that returns information like the Piotroski score, Altman Z-score, and more. Here's a quick example of what the data looks like when you call the endpoint:

[{
"symbol": "AAPL",
"altmanZScore": 9.29255987524666,
"piotroskiScore": 8,
"workingCapital": -23405000000,
"totalAssets": 364980000000,
"retainedEarnings": -19154000000,
"ebit": 123216000000,
"marketCap": 3725893542000,
"totalLiabilities": 308030000000,
"revenue": 391035000000
}]

In the above example we have data extracted for AAPL shares, to extract data for your selected stock, simply replace the AAPL ticker in the endpoint on your desired ticker and also input your custom API key, that you get after registering with FMP. The endpoint would look something like that:

https://financialmodelingprep.com/api/v4/score?symbol=AAPL&apikey=YOUR_CUSTOM_KEY

Then paste the edited endpoint to the browsers adress bar to get the result or use it in your custom code.

Understanding the Stock Target Price

The stock target price is another helpful number that analysts often provide. It represents what they believe the stock's price should be in the future, based on their research and financial models. While no one can predict the future perfectly, a target price can help you decide if a stock is currently undervalued or overvalued. For example, if a stock is trading at $50 per share, but analysts believe it should be worth $60, then there might be an opportunity to buy at a discount.

When considering a stock's target price, it's important to note that different analysts may use varying models and assumptions to arrive at their estimates. Some may focus on discounted cash flow (DCF) models, or dividend discount (DDM) model, while others rely heavily on price-to-earnings (P/E) ratios, industry benchmarks, or growth forecasts. By comparing multiple target prices from different reputable analysts or research firms, you can gain a more balanced view of a stock's potential fair value.

Target prices are also subject to change as new information comes out. Quarterly earnings reports, changes in the competitive landscape, shifts in consumer demand, or macroeconomic events can all alter the outlook for a company. Keeping track of how target prices evolve over time can help you understand market sentiment and gauge if the investment case for a particular stock is improving or deteriorating.

Combining Both Tools to Find Value Stocks

1. Find undervalued stocks: Start by picking stocks that are trading below their target price. This might mean that investors haven't yet recognized their true value.
2. Check the financial health: Use the Piotroski score to dig deeper into a company's financials. A high Piotroski score (7 or above) can be a strong sign that the company is well-run and stable.
3. Do more research: The Piotroski score and target price are helpful, but they're just starting points. Look at the company's industry, competition, and long-term outlook before you decide to buy.

If you want a convenient way to analyze stocks on the go, consider using the Stocks 2 Buy iOS app. It provides detailed stock analysis and highlights important indicators like the Piotroski score. With this app, you can quickly see whether a stock might be good for growth, value, or income investing. It also helps you decide the best time to buy and which market to focus on, making the process of finding value stocks much easier.

- The Piotroski score helps you understand a company's financial health.
- The target price helps you gauge whether a stock is trading at a fair value.
- You can easily access the Piotroski score using Financial Modeling Prep's API.

By combining both these tools, you can increase your chances of finding quality value stocks that the market might be missing today.