A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems; I used one of them the "All-Stars: Piotroski" in this article. The ranking system is based on investing principles of the well-known investor Joseph Piotroski.

The "All-Stars: Piotroski" ranking system is quite complex, and it is taking into account many factors like; price to book value (50% weight), gross margin, debt, current ratio, return on assets and shares buyback.

In order to find out how such a ranking formula would have performed during the last 17 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took all the 6,549 stocks in the Portfolio123's database.

The back-test results are shown in the chart below. For the back-test, I divided the 6,549 companies into twenty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the "All-Stars: Piotroski" rank. The highest ranked group with the ranking score of 95-100, which is shown by the light blue column in the chart, has given by far the best return, an average annual return of 19%, while the average annual return of the Russell 1000 index during the same period was 3.5% (the red column at the left part of the chart). Also, the second and the third group (scored: 90-95 and 85-90) have given superior returns. This brings me to the conclusion that the ranking system is very useful.

After running the "All-Stars: Piotroski" ranking system on all Russell 1000 stocks on September 12, I discovered the twenty best stocks, which are shown in the chart below. In this article, I will focus on the first ranked stock; Citigroup (C).

Citigroup is one of the world's largest banks, with global consumer banking, corporate banking, and investment banking operations. Citigroup has big exposure to international consumer finance, with major businesses in Latin America and Asia.

Citigroup Stock Performance

Year-to-date, C's stock is down 8.9% while the S&P 500 index has increased 4.1%, and the Nasdaq Composite Index has risen 2.4%. However, since the beginning of 2012, C's stock has gained 79.3%. In this period, the S&P 500 Index has increased 69.2%, and the Nasdaq Composite Index has gained 96.8%. According to TipRanks, the average target price of the top analysts is at $56.23, representing an upside of 19.2% from its September 9 close price, which appears reasonable, in my opinion.

C Daily Chart

C Weekly Chart

Charts: TradeStation Group, Inc.

Valuation

Regarding its valuation metrics, C's stock is considerably undervalued. The trailing P/E is very low at 9.93, and the forward P/E is even lower at 9.15. The price to free cash flow is extremely low at 3.67, and the price to book value is also very low at 0.65, the fourth lowest among all S&P 500 stocks.

The ten S&P 500 companies with the lowest price to book value ratio

Source: Portfolio123

Conclusion

Citigroup is a leading global bank with a big exposure to international consumer finance. Regarding its valuation metrics, C's stock is considerably undervalued, its price to free cash flow is extremely low at 3.67, and the price to book value is also very low at 0.65, the fourth lowest among all S&P 500 stocks. Moreover, C's stock is ranked first among all Russell 1000 companies according to Piotroski principles. The average target price of the top analysts is at $56.23, representing an upside of 19.2% from its September 9 close price, which appears reasonable, in my opinion.