Four Stocks With Low Altman Scores Rated "Sell" by VectorVest
The four stocks below all appeared on Short Screen's screener on Friday. 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 rated "Sell" by VectorVest on Friday. VectorVest rates stocks using a quantitative model that takes into account several measures of value, safety, and timing, overweighting timing and underweighting value.
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A Look At the Hedging Costs of These Stocks
The table below shows the costs of hedging these stocks against greater-than-25% 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 greater-than-20% decline with optimal puts. First, a reminder about what optimal puts mean in this context, and why I've used 25% as a decline threshold here; then, a screen capture showing the optimal puts for that comparison ETF (SPY).
About Optimal Puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor 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..
You can enter any percentage you like as a decline threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). Most of the time, I use 20% thresholds when hedging, for reasons I've mentioned in previous posts, but here I've used 25% because these stocks are so expensive to hedge that there would be no optimal put option contracts available for any of them if I used 20% thresholds.
The Optimal Puts for SPY
Here is a screen shot showing the optimal puts for the comparison ETF listed below, SPY. This shows the optimal put option contracts to buy to hedge 100 shares of SPY against a greater-than-25% drop between now and March, 16, 2012. Two notes about these optimal put options and their cost:
- To be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask.
- As volatility has climbed, so have hedging costs. The VIX closed at 30.98 on Friday, September 16. On Tuesday, July 5, when the VIX was at 16.06, the cost of hedging SPY against a greater-than-25% decline over the next six months was 0.89% of position value, as we noted in this article published the following day. As the screen shot below shows, on Friday, the cost of hedging SPY against the same decline over about the same time frame was 2.39%.
Why There Were no Optimal Contracts for AMCC
In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with Applied Micro Circuit Corporation (AMCC). As of Friday, the cost of protecting against a greater-than-25% decline in that stock over the next several months was itself greater than 25%. Because of that, Portfolio Armor indicated that no optimal contracts were found for it.
Hedging Costs as of Friday
The data in the table below is as of Friday's close:
Cost of Protection (as % of Position value)
Low Altman Z-Score Stocks
Applied Micro Circuit Corporation
No Optimal Contracts
Hertz Global Holdings, Inc.
|Index ETF Comparison|
|SPY||SPDR S&P 500 Trust||2.39%**|
*Based on optimal puts expiring in February, 2012
**Based on optimal puts expiring in March, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.