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Academic studies have shown in multiple time frames, in multiple markets, that there is a value effect. Stocks that sell at the deepest discounts to accounting values of their equity have enjoyed higher returns than stocks that sell at the highest premiums to their equity values. On the basis of overwhelming empirical evidence, the price-to-book ratio is a useful starting point for value investing.

However, these stocks suffer incredible risks. Many of these stocks are on the verge of bankruptcy, have lagged financial statements which do not accurately portray current equity values, or cannot be rationally valued on the basis of reported financial statements. Since the price-to-book ratio has been connected to long-term returns, is there a long-term measure of risk we can use? Fortunately, there are methods that can help distinguish value investments from value traps.

One predictive measure of bankruptcy for non-financial companies is the Altman Z-Score. This score places companies into three groups: “safe” (Z-score > 2.99), “grey” (Z-score between 2.99 and 1.81), and “distressed*” (Z-score < 1.81), and is surprisingly useful for identifying bankruptcy risk in the coming year. This method of segmenting companies uses of fundamental (financial statement) data and market capitalization only.** Beyond credit risk prediction, companies with higher Z-scores have been shown to outperform companies with lower Z-scores, in aggregate.

The Altmans Z-score was recently (using financial data reported this year) calculated for hundreds of companies with price to book ratios under 1. Low P/B multiple companies which scored in the “safe” and “grey” zones are presented below:

Ticker

Financial Statement Date

P/E

P/B

Altman Z-Score

MAXY

30-Jun-11

2.69

0.99

21.51

KGJI

30-Jun-11

2.52

0.58

14.46

QLTI

30-Jun-11

0.99

14.27

ASTX

30-Jun-11

7.21

0.96

13.98

ARCW

30-Jun-11

0.78

13.85

INSM

30-Jun-11

0.49

12.90

MYRX

30-Jun-11

0.61

12.01

WZE

30-Jun-11

0.67

11.84

APT

30-Jun-11

56.50

0.71

11.30

RBCN

30-Jun-11

4.51

0.98

10.48

NOBH

7-May-11

0.57

10.45

DIT

30-Jun-11

5.37

0.79

9.19

ANGO

31-Aug-11

48.39

0.92

8.66

HLYS

30-Jun-11

0.72

8.47

AE

30-Jun-11

6.90

1.00

8.27

UUU

30-Jun-11

24.09

0.47

7.72

CVR

30-Jun-11

19.10

0.75

7.05

AIRT

30-Jun-11

10.20

0.79

6.97

QBAK

30-Jun-11

0.80

6.84

TA

30-Jun-11

0.44

6.75

PCCC

30-Jun-11

8.02

0.81

6.56

MPAC

2-Jul-11

9.73

0.76

6.55

ANTP

30-Jun-11

36.00

0.62

6.54

GENC

30-Jun-11

9.86

0.65

6.54

HOFT

31-Jul-11

32.48

0.80

6.10

TSRI

31-Aug-11

36.45

0.63

6.08

ABAT

30-Jun-11

1.73

0.31

6.04

NAFC

18-Jun-11

6.88

0.81

6.02

TQNT

2-Jul-11

10.31

0.94

5.90

LHCG

30-Jun-11

6.64

0.96

5.80

ISNS

30-Jun-11

18.85

0.66

5.80

MOC

30-Jun-11

13.31

0.99

5.73

FLXS

30-Sep-11

9.54

0.74

5.72

AFAM

30-Jun-11

6.16

0.81

5.55

RCMT

2-Jul-11

13.83

0.91

5.50

CYBE

30-Jun-11

10.80

0.99

5.46

HRT

30-Jun-11

0.58

5.42

IM

2-Jul-11

11.53

0.87

5.34

SNX

31-Aug-11

7.49

0.91

5.33

RIMG

30-Jun-11

15.85

0.83

5.32

IDSA

30-Jun-11

6.19

0.91

5.27

ESIO

2-Jul-11

16.45

0.96

5.08

CDI

30-Jun-11

641.00

0.91

5.05

SYNL

2-Jul-11

8.67

0.90

5.03

PARL

30-Jun-11

0.71

5.02

KELYA

3-Jul-11

13.04

0.88

4.97

SKY

31-Aug-11

0.81

4.89

KRSL

31-Dec-08

5.83

0.42

4.89

MALL

30-Jun-11

8.44

0.59

4.86

UFPI

25-Jun-11

81.91

0.88

4.83

FORD

30-Jun-11

0.83

4.82

BPHX

31-Dec-97

0.48

4.71

PNS

30-Jun-11

2.82

0.93

4.67

GTSI

30-Jun-11

53.62

0.45

4.64

LGL

30-Jun-11

2.62

0.79

4.64

STRT

3-Jul-11

13.97

0.88

4.62

COHU

25-Jun-11

11.01

0.91

4.62

SPAR

30-Jun-11

45.00

0.91

4.61

WTT

30-Jun-11

19.00

0.74

4.49

BTN

30-Jun-11

6.33

0.96

4.48

SVT

30-Jun-11

10.06

0.90

4.47

MSN

30-Jun-11

3.41

0.75

4.47

AEIS

30-Jun-11

5.70

0.95

4.44

HVT

30-Jun-11

60.74

1.00

4.40

PTRY

30-Jun-11

20.53

0.97

4.39

SED

30-Jun-11

5.10

0.68

4.36

EDS

31-Dec-09

2.46

0.48

4.34

BHE

30-Jun-11

12.10

0.73

4.31

CTRN

30-Jul-11

15.53

0.85

4.24

ORN

30-Jun-11

21.61

0.74

4.20

SDBT

30-Jun-11

0.94

4.19

WSTL

30-Jun-11

1.78

0.82

4.17

WINN

29-Jun-11

0.43

4.15

SFE

30-Jun-11

2.29

0.94

4.12

ORBC

30-Jun-11

0.72

4.03

IVAC

2-Jul-11

37.55

0.85

4.02

BSET

27-Aug-11

1.57

0.55

4.02

PSEM

2-Jul-11

15.87

0.86

3.97

FEIM

31-Jul-11

10.01

0.92

3.95

WMAR

2-Jul-11

10.65

0.79

3.93

LLNW

30-Jun-11

0.99

3.92

TUES

30-Jun-11

23.67

0.60

3.88

PRCP

30-Jun-11

27.40

0.85

3.88

SIGM

30-Jul-11

0.72

3.88

BNHN

17-Jul-11

188.60

1.00

3.87

ZEUS

30-Jun-11

14.57

0.80

3.85

LAWS

30-Jun-11

15.09

0.95

3.85

BABY

30-Jun-11

22.41

0.86

3.85

LINC

30-Jun-11

3.23

0.75

3.83

KTCC

2-Jul-11

7.85

0.66

3.82

KBALB

30-Jun-11

42.38

0.54

3.81

ZOLT

30-Jun-11

0.82

3.78

VLO

30-Jun-11

10.84

0.90

3.77

AEY

30-Jun-11

8.08

0.61

3.74

FRPT

30-Jun-11

0.89

3.69

FDP

1-Jul-11

15.52

0.86

3.68

INSP

30-Jun-11

14.48

0.97

3.67

KSW

30-Jun-11

10.27

0.86

3.66

ANAD

2-Jul-11

1.00

3.64

BKR

30-Jun-11

18.45

0.93

3.62

ANCI

30-Sep-10

0.42

3.62

SKX

30-Jun-11

0.79

3.62

CMKG

30-Jun-11

0.94

3.61

UFI

26-Jun-11

10.48

0.56

3.59

CSPI

30-Jun-11

25.00

0.65

3.54

RVSN

31-Dec-04

0.85

3.54

CBK

27-Aug-11

0.77

3.53

CRAI

2-Jul-11

0.82

3.50

TLAB

1-Jul-11

0.92

3.50

TWMC

30-Jul-11

0.42

3.50

CRV

30-Jun-11

0.42

3.50

FORM

25-Jun-11

0.81

3.50

WVVI

30-Jun-11

21.36

0.93

3.46

RCKY

30-Jun-11

7.11

0.70

3.45

DUCK

31-Jul-11

0.38

3.42

GIGA

25-Jun-11

0.27

3.42

RVP

30-Jun-11

4.48

0.81

3.41

REX

31-Jul-11

36.80

0.68

3.39

BTUI

3-Jul-11

9.10

0.84

3.39

CUO

2-Jul-11

0.39

3.36

CECO

30-Jun-11

3.75

0.67

3.32

DLA

2-Jul-11

7.59

0.99

3.31

PATK

26-Jun-11

3.54

0.74

3.28

AM

26-Aug-11

6.76

0.78

3.27

PDEX

30-Jun-11

2.81

0.71

3.27

MTEX

30-Jun-11

0.67

3.23

BDL

2-Jul-11

8.75

0.88

3.22

FFEX

30-Jun-11

0.31

3.21

BG

30-Jun-11

9.76

0.75

3.20

TIII

30-Jun-11

8.18

0.61

3.20

KEQU

31-Jul-11

19.04

0.74

3.19

KSWS

30-Jun-11

0.78

3.19

UPG

30-Jun-11

5.37

0.49

3.17

NHC

30-Jun-11

9.50

0.87

3.15

STRL

30-Jun-11

12.01

0.80

3.14

CRRC

25-Jun-11

0.71

3.14

FRS

20-Sep-11

21.95

0.77

3.13

CAS

30-Jun-11

59.52

0.89

3.13

HAST

31-Jul-11

0.19

3.12

EVK

30-Jun-11

2.27

0.46

3.11

WPO

3-Jul-11

12.46

0.96

3.10

VTNC

30-Jun-11

0.88

3.09

STLY

1-Oct-11

0.77

3.08

LUB

4-May-11

153.67

0.80

3.07

SYMS

27-Aug-11

0.93

3.07

SCX

30-Jun-11

11.52

0.52

3.07

BIDZ

30-Jun-11

0.29

3.03

TFCO

30-Jun-11

0.43

3.00

BBW

2-Jul-11

0.79

3.00

NAVR

30-Jun-11

4.84

0.79

2.99

IMKTA

25-Jun-11

10.30

0.88

2.98

CHRS

30-Jul-11

0.94

2.98

OMG

30-Jun-11

8.41

0.66

2.96

SSP

30-Jun-11

32.96

0.85

2.95

APOG

27-Aug-11

0.92

2.95

ASYS

30-Jun-11

4.09

0.89

2.95

WLDN

1-Jul-11

19.25

0.85

2.94

LAKE

31-Jul-11

12.09

0.52

2.94

UVV

30-Jun-11

8.29

0.82

2.93

SAIA

30-Jun-11

22.81

0.99

2.91

ODP

25-Jun-11

0.59

2.89

PTIX

30-Jun-11

0.60

2.89

POWR

30-Jun-11

5.48

0.78

2.88

COBR

30-Jun-11

8.11

0.71

2.88

BDR

30-Jun-11

8.86

0.35

2.87

ESCA

27-Dec-09

11.15

0.71

2.85

GPRE

30-Jun-11

9.46

0.70

2.85

CSCD

30-Jun-11

0.77

2.84

JBSS

24-Mar-11

22.44

0.50

2.84

WEX

30-Jun-11

0.46

2.83

LAYN

31-Jul-11

11.99

0.92

2.83

STNG

31-Dec-09

0.59

2.83

NSYS

30-Jun-11

8.13

0.42

2.79

KID

30-Jun-11

2.55

0.45

2.79

LUK

30-Jun-11

3.00

0.93

2.78

FOE

30-Sep-11

9.61

0.95

2.77

BBOX

2-Jul-11

9.60

0.61

2.75

OESX

30-Jun-11

36.50

0.72

2.75

BWS

30-Jul-11

19.02

0.96

2.73

IVC

30-Jun-11

18.27

0.98

2.72

FVE

30-Jun-11

3.53

0.53

2.72

ABL

30-Jun-11

4.07

0.34

2.70

SGMA

31-Jul-11

10.43

0.28

2.70

ELY

30-Jun-11

0.57

2.68

CNTY

30-Jun-11

27.67

0.52

2.68

NWPX

30-Jun-11

30.06

0.92

2.68

TAIT

30-Jun-11

0.28

2.67

ADGF

30-Jun-11

8.21

0.72

2.67

SRT

30-Jun-11

0.49

2.66

JAX

3-Jul-11

12.55

0.77

2.66

AIR

31-Aug-11

10.55

0.93

2.66

HWG

30-Jun-11

0.31

2.64

LLEN

31-Jul-11

3.16

0.64

2.63

PFIN

30-Jun-11

7.37

0.55

2.62

KALU

30-Sep-11

43.99

0.93

2.62

PAR

30-Jun-11

0.80

2.61

CENT

25-Jun-11

15.57

0.95

2.61

NEI

30-Jun-11

10.75

0.91

2.61

TDW

30-Jun-11

26.45

0.96

2.59

CASA

3-Oct-10

0.13

2.59

IFON

30-Jun-11

0.48

2.57

RGS

30-Jun-11

0.92

2.57

NOOF

30-Jun-11

0.41

2.56

BAMM

30-Jul-11

0.31

2.56

CCRN

30-Jun-11

0.63

2.55

PRMW

30-Jun-11

0.83

2.55

ANIK

30-Jun-11

15.89

0.90

2.54

TGX

30-Jun-11

20.13

0.67

2.53

VSEC

30-Jun-11

6.18

0.96

2.52

CADC

30-Jun-11

2.46

0.50

2.52

JNY

2-Jul-11

31.42

0.91

2.51

MDCI

30-Jun-11

21.36

0.59

2.51

DDE

30-Jun-11

18.17

0.62

2.50

FBN

30-Jun-11

0.41

2.49

ABH

30-Jun-11

0.53

0.42

2.49

ADUS

30-Jun-11

8.13

0.46

2.48

PSUN

30-Jul-11

0.51

2.46

PTSI

30-Jun-11

0.66

2.43

ACM

30-Jun-11

9.45

0.97

2.41

TSON

30-Jun-11

0.85

2.40

ZLC

31-Jul-11

0.57

2.40

AAWW

30-Jun-11

9.21

0.93

2.38

URS

1-Jul-11

10.76

0.67

2.38

LPL

31-Mar-04

0.78

2.36

HDNG

30-Jun-11

19.47

0.59

2.35

SSY

30-Jun-11

0.49

2.34

SENEA

1-Oct-11

54.05

0.69

2.34

JOEZ

#########

0.56

2.34

AP

30-Jun-11

21.62

0.98

2.34

HZO

30-Jun-11

0.83

2.33

EPAX

30-Jun-11

17.81

0.95

2.33

CSC

1-Jul-11

6.31

0.61

2.32

AOL

30-Jun-11

7.02

0.69

2.32

SYMX

30-Jun-11

0.81

2.31

UWN

31-Jul-11

0.86

2.31

CBR

30-Jun-11

0.69

2.31

AIP

31-Dec-00

13.66

0.98

2.31

PIKE

30-Jun-11

186.00

0.99

2.30

CKH

30-Jun-11

34.83

0.99

2.30

CONN

31-Jul-11

0.79

2.29

USM

30-Jun-11

22.25

0.94

2.29

SMSI

30-Jun-11

0.22

2.28

LACO

3-Jul-11

0.44

2.27

RT

30-Aug-11

13.41

0.85

2.27

ESA

30-Jun-11

8.75

0.68

2.26

VOXX

31-Aug-11

6.03

0.44

2.25

MFRI

31-Jul-11

0.63

2.25

RDC

30-Jun-11

21.01

0.99

2.24

USCR

30-Jun-11

0.43

2.23

STRC

30-Jun-11

0.68

2.23

BGC

1-Jul-11

10.21

0.79

2.23

IBI

1-Jul-11

16.73

0.95

2.23

CHUX

10-Jul-11

0.80

2.22

RWC

30-Jun-11

0.49

2.22

MSON

30-Jun-11

0.78

2.22

DOLE

18-Jun-11

0.99

2.21

TECUA

30-Jun-11

0.28

2.20

MSII

31-Mar-11

0.23

2.19

DSPG

30-Jun-11

0.87

2.18

BONT

30-Jul-11

6.38

0.92

2.17

FARM

31-Mar-11

0.72

2.17

COCO

30-Jun-11

0.36

2.16

GV

30-Jun-11

31.00

0.54

2.15

TEX

30-Jun-11

183.44

0.90

2.15

NTSC

31-Jul-11

24.21

0.82

2.15

ITT

30-Jun-11

5.88

0.88

2.15

OCR

30-Sep-11

54.60

0.91

2.12

IESC

30-Jun-11

0.44

2.11

ACMR

2-Jul-11

0.35

2.10

IPSU

30-Jun-11

0.40

2.09

OMX

25-Jun-11

10.65

0.67

2.07

GAIA

30-Jun-11

0.61

2.06

HNR

30-Jun-11

0.88

2.06

USAK

30-Jun-11

0.76

2.06

AIM

29-Jul-11

0.96

2.05

BKS

30-Jul-11

0.93

2.05

CQB

30-Jun-11

5.43

0.44

2.04

CRTX

30-Jun-11

25.88

0.95

2.03

PENX

#########

0.49

2.02

MDTH

30-Jun-11

0.48

2.02

ISCA

31-Aug-11

19.51

0.93

1.98

STRI

30-Jun-11

7.24

0.94

1.97

CNAM

30-Jun-11

0.15

1.97

BEAT

30-Jun-11

0.51

1.97

X

30-Sep-11

0.9

1.96

PWX

30-Jun-11

0.91

1.96

GOLF

2-Jul-11

121.67

0.82

1.96

SPOR

31-Mar-09

0.24

1.96

ADPI

30-Jun-11

14.58

0.79

1.95

WALK

30-Sep-08

0.84

1.93

RSYS

30-Jun-11

0.92

1.93

CHMP

31-Jul-11

3.96

0.4

1.90

SUNH

30-Jun-11

3.14

0.29

1.90

MEMS

30-Jun-11

0.77

1.88

SEH

30-Jul-11

0.65

1.87

SPRO

30-Jun-11

51.5

0.84

1.86

NSPH

30-Jun-11

1

1.86

BZ

30-Jun-11

5.76

0.8

1.86

CKP

26-Jun-11

34.14

0.83

1.86

WHR

30-Jun-11

11.2

0.91

1.86

ALDA

31-Dec-09

0.56

1.85

ACLS

30-Jun-11

12.55

0.69

1.84

VII

30-Jun-11

0.67

1.84

DRIV

30-Jun-11

37.08

0.98

1.84

INOC

30-Jun-11

0.79

1.83

TRT

30-Jun-11

0.42

1.83

USEG

30-Jun-11

0.66

1.82

RNWK

30-Jun-11

39.13

0.8

1.81

BRCD

30-Jul-11

28.06

0.99

1.81

Since there is only the faintest relationship between Altman Z-score and P/B ratio among very low price-to-book ratio stocks, the Altman Z-score might be able to inform the attractiveness of value investments for potential bankruptcies. Moreover, a score that lands a stock in the “grey” zone should inspire additional analysis before investing in the company.

*“Distressed” was a label coined by researchers, and should not be taken to mean that any company is bankrupt or in default on the basis of this calculation alone. Credit scoring is not fate, only prediction based on relative past performance of companies grouped by key variables. Time will tell.

**Volatility has be incorporated into a credit scoring model to improve accuracy, but this would reduce the value of a fundamentals-only model for indicating companies for option strategies.

Source: November's Low Price To Book Stocks Vs. Bankruptcy Risks