On Thursday night, I placed limit orders to short ADA-ES, Inc. (ADES) and buy an equivalent dollar amount of Albemarle Corporation (ALB). If my limit orders get filled on Friday, I intend to place double digit trailing stops on both sides of this market neutral trade.
Deciding how wide to make those trailing stops can be tricky though: In a recent blog post ("Revisiting a losing market neutral trade"), I mentioned an example of stops leading to an early, unprofitable exit on a previous market neutral trade (Long YUM! Brands, Inc. (YUM), Short Country Style Cooking Restaurant Chain Co., Ltd. (CCSC).
The short side of this market neutral trade
ADA-ES, Inc. manufactures specialty chemicals and equipment for the coal-fired utility industry.
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Short Screen shows an Altman Z-Score of 0.29 for ADA-ES, Inc. Recall that scores below 1.8 and below are considered to be indications of financial distress, and scores of 3 and above are considered to be indications of financial strength.
ADA-ES, Inc. had negative earnings over the trailing twelve months and has an PEG ratio of -0.19 based on analysts’ estimates of its (negative, expected) earnings over the next five years.
The long side of this market neutral trade
Albemarle Corporation manufactures specialty chemicals used in plastic enclosures for consumer electronics, foam insulation, and other applications.
Short Screen shows an Altman Z-Score of 4.36 for Albemarle Corporation.
Albemarle Corporation has an PEG ratio of 1.27 based on analysts’ estimates of its earnings over the next five years.
Disclosure: I have limit orders in to buy ALB and short ADES.