Five Stocks With Low Altman Scores Trading Below Their 50 DMAs
The five stocks below all appeared on Short Screen's screener Monday. Short Screen’s screener uses the Altman Z-Score model to rank the manufacturing stocks in its database, and the modified version of that model, the Altman Z”-Score model, to rank the non-manufacturing stocks. Each of the stocks below has scores that indicate financial distress, according to the model.
In addition, each of these stocks was trading below its 50 day moving average on Monday (click on images to enlarge).
A Look At the Hedging Costs of These Stocks
Unsurprisingly, these stocks with low Altman scores and downward trending share prices are, on average, quite expensive to hedge even with optimal puts. The table below shows the costs of hedging them against greater-than-20% declines over the next several months, using optimal puts.
For comparison purposes, I've also added the costs of hedging the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) against the same decline. First, a reminder about what optimal puts mean in this context, and why I've used 20% as a decline threshold.
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task.
With Portfolio Armor (available in Seeking Alpha's Investing Tools Store and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own, and the maximum decline you're willing to risk (your threshold - you can enter any percentage you like, but the larger the percentage, the greater the chance there will be optimal puts available for the position). Then the app uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones (there is a step by step example of that in this article, "Helping House Majority Leader Eric Cantor Hedge his Treasuries Exposure").
You can enter any percentage you like for a threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). The idea for a 20% threshold comes, as I've mentioned before, from a comment fund manager John Hussman made in a market commentary in October 2008:
An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).
Essentially, 20% is a large enough threshold that it reduces the cost of hedging, but not so large that it precludes a recovery.
How Costs Are Calculated
To be conservative, Portfolio Armor calculated the costs below based on the ask prices of the optimal put options. In practice, though, an investor may be able to buy some of these put options for less (i.e., at a price between the bid and the ask).
Hedging Costs as of Monday
The data in the table below is as of Monday's close:
Cost of Protection (as % of Position value)
Low Altman Z-Score Stocks
JDS Uniphase Corporation
TAL International Group
Virgin Media Inc.
JAKKS Pacific, Inc.
|Index ETF Comparison|
|SPY||SPDR S&P 500 Trust||1.30%**|
*Based on optimal puts expiring in December, 2011
**Based on optimal puts expiring in January, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.