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

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.