Taking Out the Trash and Boosting Returns
Wall Street and the mainstream financial media love to push the same tired narratives. They tell you to chase momentum, buy high-flying tech stocks, and worship the so-called "experts" who are always late to the party. Meanwhile, the real money—the kind that compounds quietly and turns into generational wealth—is made by doing what they don’t want you to do: buying deeply undervalued stocks that are priced for disaster but have the financial strength to survive and thrive.
Deep value investing is about beating Wall Street at its own game. It’s about finding opportunities in places the suits at hedge funds and CNBC talking heads ignore or dismiss. But let’s be honest—sometimes, what looks cheap is just garbage. And garbage stays garbage. That’s where quality metrics come in.
If you want to separate real opportunities from value traps, you need more than just low P/TBV. That’s where Piotroski F-Score, Altman Z-Score, and Gross Profitability come into play. These indicators help us weed out the losers and stack our portfolio with deep value plays that actually have a shot at turning into big winners.
Why Low P/TBV Alone Isn’t Enough
Buying stocks below tangible book value is a great starting point. Stocks in the bottom decile of P/TBV have historically outperformed the market over the long haul. But here’s the catch: within that group, some stocks shoot to the moon, while others crash and burn. Without a quality filter, you’re just throwing darts in the dark.
Joseph Piotroski figured this out back in 2000. His research showed that filtering for financially strong deep value stocks (using his now-famous F-Score) boosted returns by 7.5% annually over picking cheap stocks alone. That’s a massive difference over time. Altman’s Z-Score adds another layer—helping us avoid companies on the brink of bankruptcy. Then there’s Gross Profitability, which Robert Novy-Marx showed was just as predictive of future returns as book value itself.
Meanwhile, Wall Street keeps telling you to ignore these simple but powerful metrics. Why? Because they want you playing their game—chasing shiny objects and reacting to headlines, instead of quietly compounding wealth in boring, undervalued stocks. They profit from your impatience. You profit from doing the opposite.
In other words, “cheap and good” beats “cheap and junk” every time.
Empirical Evidence: The Numbers Don’t Lie
Piotroski F-Score: If you took a list of the cheapest 20% of stocks by book value and only bought the ones with an F-Score of 8 or 9 (out of 9), you’d have outperformed the market by 10% annually. The kicker? You’d also have avoided most of the absolute disasters that wreck unfiltered deep value portfolios.
Altman Z-Score: This classic bankruptcy risk indicator helps us sidestep companies that might look cheap today but won’t be around tomorrow. In one backtest, a high-Z-Score portfolio (Z > 3) beat the market over multiple decades, while low-Z stocks dragged down performance.
Gross Profitability: Novy-Marx found that stocks with high gross profits-to-assets ratios delivered higher returns than traditional value stocks, especially in large caps. A strategy that combined deep value (low P/B) and high profitability crushed a pure value approach.
Wall Street will tell you this is too simple. They’d rather have you believe that investing requires their expensive funds, complex models, and Ivy League credentials. The truth? Adding quality metrics to deep value investing improves returns, reduces risk, and helps us sleep better at night.
Sector-Specific Insights: Where This Strategy Shines
Financials (Banks, Insurance): Low P/TBV is a common valuation metric in banking stocks. But without a quality filter, you’re playing with fire. A cheap bank without plenty of capital is a disaster in the making. Filtering for high capital ratios, stable loan books, and rising profitability makes all the difference.
Industrials, Materials, Energy: These sectors frequently trade below book value during downturns. Here, Gross Profitability and F-Score are great indicators of which companies will survive and rebound. A low P/TBV oil company with strong gross margins? That’s a buy. One with poor profitability and rising debt? Probably not.
Retail and Cyclicals: These are value-trap central. If a retailer looks cheap but has a low F-Score and Z-Score, there’s a good chance it’s headed for bankruptcy. A perfect example? Sears. Looked cheap for years but was a total train wreck. On the other hand, stocks like Best Buy, which showed improving quality metrics, ended up being multi-baggers.
How to Implement a “Quality-Deep Value” Portfolio
Want to actually use this strategy? Here’s how to set up a deep value portfolio that avoids the junk and loads up on winners:
Screen for Low P/TBV Stocks – Stick with the cheapest 10% of the market.
Filter Using Quality Metrics:
Piotroski F-Score ≥ 7
Altman Z-Score > 3
Gross Profitability in top 50% of the market
Diversify Across Sectors – Deep value stocks tend to cluster in certain sectors. Don’t go all-in on one industry.
Rebalance Quarterly– These financial metrics update every quarter so check back in and reweight the portfolio accordingly.
Backtests show that portfolios built this way outperform standard value investing by 5–10% annually, with lower risk. That’s a major edge.
Final Thoughts: “Cheap and Good” Wins the Game
Wall Street wants you to believe that investing success requires complexity, high fees, and following their herd. They want you hooked on narratives that keep their funds flowing while you chase market darlings at peak valuations.
Deep value investing is the antidote. Buying stocks trading at dirt-cheap valuations has been a winning strategy for decades. But let’s be real—piling into stocks just because they’re cheap is a great way to end up with a portfolio full of duds. Adding quality metrics like Piotroski F-Score, Altman Z-Score, and Gross Profitability is the key to unlocking even better returns with less risk.
If you want to beat the market and actually stay in the game long enough to enjoy it, you need to avoid the losers. This strategy helps you do exactly that. So, the next time you’re bargain hunting, ask yourself: Is this stock just cheap? Or is it cheap and good?
That’s the difference between value investing and smart value investing. And the latter is where the real money is made.
Great post - as Garrett Baldwin, whom you know also likes these scoring metrics
what service do you recommend to run these scans that provides the relevant metrics ??