Here's a list of low price to earnings stocks with "safe" Altman Z-scores
In order to choose stocks that are cheap but are at low risk of bankruptcy, we need a quantitative predictor of credit risk. Fortunately, the Altman Z-Score can help distinguish value investments from value traps.
The Altman Z-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). This metric is surprisingly useful for identifying bankruptcy risk in the coming year. Atlman's method of segmenting companies uses 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.
Altman Z-score was recently calculated for hundreds of companies with P/E multiples under 10 as of March 2012. Low P/E companies which scored in the "safe" zone are presented with below:
Ticker | Company | P/E | P/B | Altman Z-score | 10-Year Average ROE |
Omega Protein Corp. | 4.51 | 0.77 | 3.12 | 4.5% | |
Convergys Corporation | 4.79 | 1.05 | 3.80 | 6.2% | |
LML Payment Systems Inc. | 5 | 1.16 | 4.37 | 4.4% | |
Emerson Radio Corp. | 5.1 | 0.85 | 4.72 | 19.1% | |
Delek US Holdings Inc. | 5.28 | 1.28 | 4.16 | 11.0% | |
Quanex Building Products | 5.69 | 1.46 | 4.92 | 7.4% | |
SL Industries Inc. | 5.78 | 1.33 | 4.43 | 4.1% | |
ITT Educational Services Inc. | 5.85 | 10.06 | 8.33 | 93.3% | |
HollyFrontier Corporation | 5.86 | 1.45 | 3.17 | 26.0% | |
Whiting USA Trust I | 5.91 | 4.58 | 954.44 | 13.1% | |
Great Northern Iron Ore Properties | 6.48 | 14.49 | 17.40 | 98.6% | |
Pan American Silver Corp. | 6.49 | 1.4 | 116.45 | 12.7% | |
Seaboard Corp. | 6.83 | 1.13 | 5.35 | 14.6% | |
Core Molding Technologies Inc. | 6.93 | 1.42 | 3.93 | 11.8% | |
Pioneer Southwest Energy Partners | 6.99 | 3.8 | 6.16 | 28.4% | |
Hallador Energy Company | 7.09 | 1.58 | 4.14 | 8.3% | |
Atlas Pipeline Partners LP | 7.15 | 1.57 | 3.14 | 4.2% | |
Versar Inc. | 7.21 | 0.84 | 4.36 | 7.2% | |
PC Connection, Inc. | 7.62 | 0.79 | 6.57 | 5.0% | |
Valero Energy Corporation | 7.63 | 0.95 | 4.05 | 12.5% | |
Friedman Industries Inc. | 7.67 | 1.13 | 7.77 | 11.9% | |
Universal Power Group Inc. | 7.7 | 0.46 | 3.76 | 8.4% | |
Global Power Equipment Group Inc. | 7.85 | 1.82 | 7.37 | 7.6% | |
Tesoro Corporation | 7.9 | 1.13 | 4.28 | 11.6% | |
KapStone Paper and Packaging | 8.02 | 1.78 | 4.00 | 7.8% | |
TeleNav, Inc. | 8.12 | 1.42 | 6.58 | 5.3% | |
Bridgepoint Education, Inc. | 8.13 | 3.55 | 7.52 | 10.8% | |
Torch Energy Royalty Trust | 8.19 | 1.61 | 33.17 | 24.0% | |
Alliance Resource Partners LP | 8.2 | 3.93 | 3.49 | 55.5% | |
Servotronics Inc. | 8.2 | 0.99 | 4.74 | 8.0% | |
Chevron Corporation | 8.21 | 1.8 | 4.57 | 20.2% | |
CF Industries Holdings, Inc. | 8.35 | 2.65 | 3.36 | 11.9% | |
Natural Alternatives International | 8.43 | 1.21 | 6.34 | 4.8% | |
Crown Crafts Inc. | 8.45 | 1.18 | 5.40 | 5.7% | |
Forest Laboratories Inc. | 8.45 | 1.63 | 6.28 | 23.0% | |
Lexmark International Inc. | 8.53 | 1.8 | 3.14 | 26.6% | |
GameStop Corp. | 8.63 | 1.1 | 3.49 | 13.1% | |
AGCO Corporation | 8.73 | 1.69 | 3.64 | 5.7% | |
Perry Ellis International Inc. | 8.78 | 0.76 | 3.00 | 8.1% | |
Kronos Worldwide Inc. | 8.84 | 3.07 | 3.93 | 19.9% | |
Hi Tech Pharmacal Co. Inc. | 8.93 | 2.13 | 11.24 | 12.6% | |
Best Buy Co. Inc. | 8.95 | 1.58 | 3.28 | 21.3% | |
Metalico Inc. | 9.04 | 0.99 | 3.29 | 17.1% | |
Communications Systems Inc. | 9.14 | 1.14 | 7.18 | 6.1% | |
Nutraceutical International Corp. | 9.14 | 1.1 | 4.21 | 5.6% | |
Dell Inc. | 9.2 | 3.49 | 3.52 | 48.7% | |
Flanigan's Enterprises Inc. | 9.22 | 0.75 | 3.25 | 9.9% | |
G-III Apparel Group, Ltd. | 9.31 | 1.47 | 3.51 | 8.1% | |
The Andersons, Inc. | 9.32 | 1.63 | 4.64 | 14.0% | |
CRDN | Ceradyne Inc. | 9.34 | 1.07 | 4.32 | 17.0% |
ManTech International | 9.42 | 1.16 | 3.96 | 12.0% | |
Advance America, Cash Advance | 9.56 | 2.26 | 5.49 | 34.5% | |
Smithfield Foods Inc. | 9.94 | 1.06 | 3.46 | 7.5% |
Surprisingly, several of the listed value stocks are large cap and mid cap household names. For example, you may have recently bought gas from Chevron Corporation which presently trades at a price-to-book ratio of 1.8, a price-to-earnings multiple of 8.2, and a price-to-sales multiple of 0.9 (trailing twelve months). Instead, you may have purchased gas from Valero Energy Corporation, a large cap stock that currently trades at a price-to-book ratio of 1.0, a price-to-earnings multiple of 7.6, and a price-to-sales multiple of 0.1. You may have seen GameStop in the mall. Its stock trades at a price-to-book ratio of 1.1, a price-to-earnings multiple of 8.6, and a price-to-sales multiple of 0.3. You may have purchased a printer from Lexmark International, a mid cap stock which trades at a price-to-book ratio of 1.8, a price-to-earnings multiple of 8.5, and a price-to-sales multiple of 0.6. You could have bought that printer at Best Buy. BBY shares trade at a price-to-book ratio of 1.6, a price-to-earnings multiple of 9.0, and a price-to-sales multiple of 0.2. Even after the recent rally, there remain interesting investment opportunities which are not obscure micro cap and nano cap stocks.
Regardless of fame, all the firms on this list are value buys that have a low probability of bankruptcy. A diversified portfolio of 30 or more of these stocks should offer attractive risk-adjusted returns. On an individual stock basis, additional research is warranted.
*Please read the disclaimer for this article and the Altman Z-score calculation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
