Mar

5

AltmanIn the March 3 edition of Barron's there was an article by A. Bary entitled "Risky Bets". The author cites a number of stocks that are down 40% or more from their highs; he believes investing in these companies could be very profitable if the credit markets begin to normalize and the economy recovers.

There are a number of companies other than those he cites that are down 40-50% or more that may be two or three baggers when the stock market comes back. The question is, "Are they reliable companies or future bankrupts"? I've been using Value Line and Morningstar to determine the financial risk of some of these beaten down companies.

However, I'm also aware of a formula called Altman's Z-Score that predicts future bankrupts with 85% accuracy among stocks with a low Price to Book Value. A Google search yields a number of articles describing the approach and financial data to use.

The data to use are:

1) Earnings Before Interest and Taxes (EBIT)

2) Total Assets

3) Net Sales

4) Market Value of Equity

5) Total Liabilities

6) Current Assets

7) Current Liabilities

8) Retained Earnings

I have, with varying degrees of success found these data in the Yahoo, CNBC-MSNBC, and Morningstar Financial Pages. But the data are 6 or more months old or incomplete. Value Line was a big disappointment.

1) Is anyone aware of where more up-to-date and complete financial data may be found on the web?

2) Or is there a web page that lists companies along with their Z-Scores ?

Gordon Haave replies:

For those of you with Bloomberg (the system, not the mayor), there is a Z-Score function built in.

Larry Williams suggests:

For more up to data company financial data try: MSN Money or Kiplinger.

Allen Gillespie cautions:

Altman Z-Scores is designed to work for certain industries. You might have to use several different scoring methods to cover all industries.

Eric Falkenstein offers:

I just created a website with free default probabilities for public companies, US and worldwide. Better than anything else I've seen, and I've seen 'em all.


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3 Comments so far

  1. Curmudgeon 4563 on March 6, 2008 5:55 pm

    I don't have any particular use for Default Probabilities, but Dr. Falkenstein's equity factor data seems interesting. It is based on real investable companies (>1 B$ mkt cap) and this makes it preferable to the "everything on the CRSP tape" approach that many academics use. I have only just discovered his web site and I need to look at it more closely… but thank you, Dr. Falkenstein.

  2. marco dion on March 17, 2008 12:40 pm

    I have backtested the Altman Z score for different (large cap) universes and found little evidence of its use…

    I have ranked the universe studied according to Altman’s Z-score and hypotetically bought the top 20% of the universe and sold short the bottom 20% of the ranked stocks (quintiles) every month over the last 10 years.

    Looking at the backtest results, the numbers show little statistical evidence. At best “it was working but not since 2002″

    Analysing the IT and/or Telecom sector in particular is a different story: the results show a significant spread of performance between the top and bottom 20% of my ranked stocks.

    For Europe, the US and even the World, I get results reaching 22% annualised (before costs).
    The volatility of the results is however extremely high, producing an overall sharpe ratio of around only 0.5

    It is worth noting that I analysed a “large”/investable universe (a small cap universe may give much better but less easy to implement results)

    Happy to send the (heavy) spreadsheet if you are interested in seeing the results.

  3. Sribatsa Das on October 5, 2011 9:22 pm

    I came across Z-Score on your site. I am writing to inform you that that Business Compass LLC has launched a mobile app named Altman Z-Score Classic developed & enhanced in collaboration with Professor Edward Altman. This app calculates score, bond rating equivalent, probability of default and allows trend analysis. More about this app can be found at http://altmanzscoreclassic.com.

    Thank you for your time and consideration.

    Regards,

    Sribatsa Das

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