15 Stocks You May Want to Keep Out of Your Portfolio

by: Value Expectations

ValueExpectations.com has continued to provide investment ideas to help our readers make better informed investment decisions. In addition to finding Buy opportunities, VE.com also understands the importance of avoiding potential torpedoes given the current market volatility, so we have decided to provide a list of potential sell/short ideas from the S&P500 index (excluding Financials). These companies on our list look “At-Risk” of going bankrupt in the next 2 years according to the Altman Z-score (Z-Score), and look overvalued according to the AFG’s valuation framework.

Here is the list of 15 firms that you may want to avoid for your portfolio.

Overvalued S&P 500 Companies (Ex. Financials) with Poor Z-Scores (Altman Z-Score)

AFG Sell Criteria: When identifying possible sell/short opportunities (torpedoes) The Applied Finance Group starts by running a screen using its proprietary Sell Criteria variables starting with Economic Margin. Economic Margin is a measure of corporate performance that identifies how profitable a company is by measuring how much the company earns above or below its cost of capital. In addition to corporate performance, AFG looks to identify those companies that are unattractively priced using our valuation model. Last, AFG evaluates how well companies run their business using its Management Quality score, identifying companies that have management teams that destroy wealth.

The Altman Z-score - Z-score is a metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of the NYU’s Stern School of Business and first published in The Journal of Finance in September 1968. A common critique to this metric is that it was developed over 40 years ago and is no longer relevant.

In 2001, Professor Joseph D. Piotroski of The University of Chicago Graduate School of Business published a paper called "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers." Piotroski showed that value investors were rewarded by looking at a firm’s financial health and he showed that Z-score was a meaningful statistic.

More recently, on December 5, 2008, Dr. Altman was called to testify before a House of Representatives Committee on the condition of U.S. Automakers. In his testimony, he noted that Bloomberg, Inc. reported, “that approximately 1,000 users of their system per day access the Altman Z-Score model.”

The Altman Z-Score breaks down firms into 3 zones:
• >2.99 – Not Likely to Go Bankrupt
• 1.8 - 2.99 – Gray Area
• <1.8 – Likely to Go Bankrupt in the Next 2 Years