15 Stocks You May Want to Keep Out of Your Portfolio

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

Comments

[Gerhard Hahn:]

Why is Ford risky, ????????
I think F will go much higher in the long run

Jul 09 11:19 AM

[EJC1645:]

Your evaluation of FORD is stunningly superficial and
does not factor in what has been happening in the
automotive industry recently. Tell your analysts to do
more than read headlines and misguide the public.

Jul 09 12:00 PM

[Tokyo Picker:]

Ford's main competitor is now the US government. Which would you bet on?

Jul 09 12:50 PM

[old guy:]

What are you thinking on FORD ??? ...FORD is set to fly!

Jul 09 01:29 PM

[Michael Murphy:]

Thanks for the heads-up on SanDisk, the only semiconductor company enjoying increasing prices for its chips thanks to the explosive sales of netbook computers. Did you factor that into your model?

Jul 09 01:30 PM

[jeandit75:]

yeah about Ford, the z-score does not take into account the free money from the gvt when they'll need it...its too big to fail! LoL

Jul 09 03:37 PM

[Infinitus:]

And I thought, that the Altman Z-score is obsolete and not very accurate to determine risk of insolvency. Am I not up to date?

Jul 09 03:47 PM

[qw:]

Ford is at risk for what?
It is one company that is doing everything right, has the right management, right products, has kept the government out of its hair, has the most fuel efficient midsize car and SUV, has leadership in safety and quality in many segments, and on and on ........
Value Expectations needs to do their homework and get facts before misguiding investors.

Jul 09 09:56 PM

[sethmcs:]

"Ford's main competitor is now the US government. Which would you bet on?" Ford. The gov't would screw up a one car funeral. Look at the product decisions contemplated GM. Stupid.

As for Ford and the Z score that has to do with the pension and health care liabilities. Obama will take care of health care and inflation will take care of the pensions.

Jul 10 01:19 AM

[billddrummer:]

I began to discount the impact of the Z-score 25 years ago when I first began analyzing companies for commercial banks.

The Z-score was developed to determine the likelihood of bankruptcy based on analysis of small manufacturing companies based in the Midwest. My assessment of the statistic showed that it didn't properly identify the likelihood of bankruptcy for service companies, real estate investment firms, technology companies, telecommunications firms, airlines, transportation companies, or a myriad of other firms that are part of the business landscape now, but didn't exist when the formula was devised.

I agree with Infinitus: Despite the hits, I believe the Z score is obsolete when identifying the risk of bankruptcy for all but a narrow band of companies that are true vertically integrated manufacturing entities.

As we know, most of those companies have moved to China.

Jul 10 02:22 AM

[Michael Clark:]

Ford is going to fly? Ford will fly WHEN protectionism really settles in. Why are Americans buying Japanese or German or Swedish or Korean cars when Americans are losing their jobs and America's auto industry is disappearing? Do we really benefit from ignoring our own industries and sending our money overseas? Is globalism really what they say it is? Or is it a lie to produce shoddier products at higher costs with more profit per item? (I know German products are not shoddier -- but Chinese products are.)?

In the long run, as a nation, maybe our destiny is not to fill our houses up with junk from abroad and put ourselves deeper and deeper into debt, for the 'good of the world economy'.

Jul 10 08:29 AM

[Alan Brochs...:]

Verisign generates significant free cash flow and has no net debt. Why are they going to go bankrupt?

Jul 10 08:32 AM

[khaz:]

Ford now has the highest cost of capital, no matching UAW concessions, too many dealerships, no government backed finance arm, the most debt ... I could go on, but you get the idea. The risks of a 'me too' Ford bankruptcy is much higher today than it was yesterday.

Jul 10 09:28 AM

[ERCaptain:]

I have one question --
How often have companies that have received the "<1.8 – Likely to Go Bankrupt in the Next 2 Years" rating actually gone bankrupt within 2 years?
Give us some historical data!

Jul 10 01:44 PM

[Deehena:]

Without question I agree the z-score is close to worthless for most companies. I've carefully and painfully used it in the past for several companies, most recently e.g., for Goodrich (GR) - the result according to z-score is that this solid credit (Moody - Baa2 stable) is already bankrupt! I've no doubt that including TWX on this list is equally baseless.


On Jul 10 02:22 AM billddrummer wrote:

> I began to discount the impact of the Z-score 25 years ago when I
> first began analyzing companies for commercial banks.
>
> The Z-score was developed to determine the likelihood of bankruptcy
> based on analysis of small manufacturing companies based in the Midwest.
> My assessment of the statistic showed that it didn't properly identify
> the likelihood of bankruptcy for service companies, real estate investment
> firms, technology companies, telecommunications firms, airlines,
> transportation companies, or a myriad of other firms that are part
> of the business landscape now, but didn't exist when the formula
> was devised.
>
> I agree with Infinitus: Despite the hits, I believe the Z score is
> obsolete when identifying the risk of bankruptcy for all but a narrow
> band of companies that are true vertically integrated manufacturing
> entities.
>
> As we know, most of those companies have moved to China.

Jul 10 03:25 PM

[AgAuMoney:]

The gov't will screw it up entirely, but they'll keep it running at a loss for decades until all the competitors are gone and buried. See AmTrac.


On Jul 10 01:19 AM sethmcs wrote:

> "Ford's main competitor is now the US government. Which would you
> bet on?" Ford. The gov't would screw up a one car funeral. Look
> at the product decisions contemplated GM. Stupid.

Jul 10 03:49 PM

[MyReference...:]

How about 15 to have in a portfolio?

Jul 10 03:54 PM

[sgt.red.blu...:]

You asked the question I was going to ask. Good thing I read through all the Comments first. These blogsters have not responded very often (that I can see) to counterpoints raised, which may indicate a lack of confidence in their arqument, or insufficient analysis in the first place.


On Jul 10 01:44 PM ERCaptain wrote:

> I have one question --
> How often have companies that have received the "<1.8 – Likely to
> Go Bankrupt in the Next 2 Years" rating actually gone bankrupt within
> 2 years?
> Give us some historical data!

Jul 10 05:02 PM

[CK Finance:]

Ford has negative stockholder's equity of $17.6b. That means if you liquidated the company today, you would owe at least that much (likely more since a number of long term assets are probably at inflated values).

I agree the company is enjoying stronger sales given their position as the only automaker not to have been bailed out. The question we have to ask is whether they will be able to generate enough profit to first pay back their liabilities, before they can even begin to reward shareholders.

Now that Chrysler & GM have gone through bankruptcy, it seems they have a lower cost structure. Ford will have to compete against the lower cost structure and I'm not sure how long its status as 'last survivor' will allow it to enjoy more sales, especially if it continues to report losses every quarter.

Jul 10 10:46 PM

[pocono:]

z-score puts me to sleep zzzzzzzzzzzzzzzzz

Jul 11 12:06 AM

[a. palmer jr.:]

Well I don't have any of those 15 but considering the government is running GM now I would be more prone to buy a new Ford in the future but I wouldn't want to own the stock.

Jul 11 01:32 AM

[tailspin:]

That argument makes Ford actually a good deal. Your stock can only to zero and you never have to pay back the full amount of debt.


On Jul 10 10:46 PM CK Finance wrote:

> Ford has negative stockholder's equity of $17.6b. That means if you
> liquidated the company today, you would owe at least that much (likely
> more since a number of long term assets are probably at inflated
> values).

Jul 12 10:20 AM

[Value Expec...:]

We appreciate all comments and look forward to providing the results of our performance every quarter and all though we may not get every stock pick correct we do provide a solid buy/sell spread with a 70% batting average on buy recommendations. Here is a link to our last performance update on our buys

www.valueexpectations....

and here is our buy sell spread

www.valueexpectations.....

Jul 14 08:41 AM

[coolsoupy:]

The author needs to buy T-Bills and retire!!!!

Jul 15 07:54 AM

[jkkell:]

I know one stock you wished you had in your portfolio when it was 78 cents per share. THC is now 4.77 and climbing. :)

Aug 19 12:32 PM