Monday, January 11, 2010

Altman Z"-score pairs trade: Long OII; Short TRMA

As of Friday's close, Short Screen showed an Altman Z"-Score of -0.13 for Trico Marine Services (Nasdaq: TRMA) and an Altman Z"-score of 9 for Oceaneering International (NYSE: OII). Recall that Z"-scores below 1.1 indicate financial distress and risk of bankruptcy, and scores above 2.6 indicate financial strength (scores in between are in the gray zone). Today I shorted TRMA at $5.31 per share and bought an equivalent dollar amount of OII at $64.70 per share.


Skoorby said...

Interesting trade. Is this a strategy that works consistently? It might be interesting to use past data to see how this works out over the longer term.

DaveinHackensack said...

By this strategy, you mean pairs trades using Altman scores? I don't know of any past data doing this exactly, but a couple of track records come to mind. One is Marc Mayor's track record at Inside ALPHA running his market neutral strategy which essentially consists of pairs trades (Marc is now a member of Short Screen, so he may be incorporating Altman data in some of these trades going forward.).

The other is the long-short strategy baskets Goldman Sachs has put together for Bloomberg using Altman data. Those aren't exactly pairs trades -- I don't remember if there's an equal number of long and short positions -- but, if memory serves, last time I checked going long the strong Altman basket and short the weak one outperformed the market significantly over a 5 year period, but underperformed it in the six months or so after the March '09 bottom.