Market Neutral Trade: Long Eastman Chemical, Short Metabolix

Includes: EMN, MBLX
by: David Pinsen

For Thursday's market neutral trade, I shorted MBLX at $9.12 and bought an equal dollar amount of EMN at $91.37. As I’ve done with the last few market neutral trades, I shared the trade idea with subscribers of the Market Neutral Notification List the night before I placed the trade.

One quick note about my plan here: In a previous post, I mentioned I planned to build up to a portfolio with 26 pairs. I've decided that would be a little unwieldy. Instead, I plan to build up to 13 pairs over the next six months or so, using wide trailing stops, and then start closing out open positions and replacing them with new ones.

On to our trade. Metabolix, Inc. (Nasdaq: MBLX), a bio-plastics company, caught my eye recently when I saw its chart.

The gap down in that chart in November occured when the company filed a disappointing 3rd quarter 10-Q, in which it reported a loss of 37 cents per share, versus a gain of 41 cents per share in the previous year's 3rd quarter.

Short Screen shows an Altman Z-Score of -0.95 for MBLX. Recall that Z-Scores below 1.81 indicate risk of bankruptcy within two years. Although MBLX has a high current ratio and no long-term debt, its negative trailing four quarters EBIT (Earnings Before Interest And Taxes) and its negative retained earnings contribute to its negative Z-score.

Out of curiosity, I also pulled up a stock report on MBLX from the MarketGrader Research tool in Seeking Alpha's Investing Tools store. MarketGrader's quantitative tool gives a sentiment rating for stocks, that takes into account technical factors as well as earnings guidance and short interest, and a fundamental rating that takes into account cash flow, profitability, and other factors. On a scale of 0-to-10, with 0 being the worst, MarketGrader gives MBLX a sentiment rating of 1.4. On a scale from 0-to-100, with 0 being the worst, MarketGrader gives MBLX an overall grade of 15.3 and a "sell" rating.

For Eastman Chemical Co. (NYSE: EMN), Short Screen shows an Altman Z-Score of 3.2 (scores of 3 and above indicate an absence of financial distress).

MarketGrader Research's tool gives EMN a sentiment rating of 8.6 on its 0-to-10 scale, an overall grade of 66 on its 0-to-100 scale, taking into account the stock's fundamentals, and a "buy" rating .

Disclosure: I am long EMN and am short MBLX