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A few of you have already seen the demo version of this site, but the live version of it is up now: ShortScreen.com. This site features an automated calculator and a screener based on the Altman models. With the calculator, all you need to do is enter a stock symbol, and the calculator will instantly give you that company's Altman Z-score, or Altman Z"-score, if it's a non-manufacturing company.

The screener runs the Altman Z-Score model on all of the manufacturing stocks in the site's database, and the Altman Z"-Score on all the non-manufacturing stocks. You can pick a minimum share price and then see a list of the 50 most distressed stocks at or above that share price, out of the universe of roughly 3,000 stocks in the site's database. You'll find a couple of the short positions I've mentioned previously on this blog among the 50 most distressed stocks at or above $9 per share.

If, like me, you think it's prudent to include some short positions in your portfolio, perhaps you will agree that a list of stocks that the Altman models predict are headed for bankruptcy might be worth considering as potential candidates for short selling (or buying puts on them, if the particular stocks have options).

The site also has a message board system with a couple of unique features. The first is that, unlike other stock message boards, there will be no bias against skeptical or bearish comments. If you've ever posted one of those on a typical message board, you probably noticed that it quickly got deleted. That makes it tough to find a balanced discussion about any stocks.

The other unique feature is the premium ranking system. Premium members will have the authority to rank comments on a scale from one to five stars. Comments that have an average rank of less than two stars after several votes will be deleted, and the highest-ranked comments will move to the top. Although non-paying registered users and paying premium members will both be able to post on the message boards, the site limits the ranking authority to premium members to discourage anyone from creating multiple accounts in order to manipulate the ranking system (which is pretty common, unfortunately, on Yahoo's message boards).

Premium members will also have the opportunity to become affiliates, and get paid to refer other premium members to the site. When you become an affiliate, you'll get a unique bit of HTML code for an affiliate badge that you can copy and paste onto your site. When you do, it will look like this:



When visitors click on your affiliate badge, they'll go to a special version of the Shortscreen sign-up page where they will get a 5% discount off of the regular membership rate, and your affiliate account will be credited with the referral.

The image above was one of the later preliminary sketches by my logo designer. At that point we were refining the steepness of the hump of the bear's withers. I wanted it to be steep to connote aggression, but when it got too steep it looked too wolf-like.

Alloy Steel, Altman Z-Scores, China, and Vertical Branding

Connecting the dots between some recent topics:

- Alloy Steel International (Nasdaq: AYSI.OB) is the sort of company that is benefiting from China's New, Self-Propelled Economy.

- The Altman Z-Score model can be used by equity investors to evaluate current long holdings for signs of financial distress, as we did with Alloy Steel most recently back in May. When the model predicted that the company was not at risk of bankruptcy at that point, we added more to our position (at about 23 cents per share), despite the weak quarter the company had just announced.

- The Altman Z-Score model can also be used to look for potential short ideas, as in the previous post re BAGL. We'll see how that one works out.

- Vertical Branding (Pink Sheets: VBDG.PK), retailer of such fine, made-in-China products such as this,



is an example of the sort of company associated with China's pre-self-propelled, more export-dependent economy. When China's exports of these sorts of products started to drop precipitously as the global economy sunk into recession, one of the concerns pundits raised was the plight of the migrant workers from China's rural West who were getting laid off. China decided to address this via its stimulus package by increasing investments in Western China, including job-creating infrastructure projects there. Infrastructure requires steel, and to make steel you need iron ore. Companies that mine for iron ore need wear plates to protect and increase the efficiency of their mining equipment. Alloy Steel International makes best-of-breed wear plates.

New Short Position: BAGL

I mentioned this in a previous comment thread, but I shorted a few shares of Einstein Noah Restaurant Group (Nasdaq: BAGL) earlier today at $13.78. This company has an Altman Z"-Score¹ of -3.2. A score below 1.1 suggests a company is at risk of bankruptcy within 1 to 2 years. It wouldn't be the first time an Einstein Bagels went bankrupt; a previous iteration of Einstein/Noah Bagels went bankrupt nine years ago. Insiders have been selling BAGL this year. The company also has negative working capital, over $117 million in total debt, less than $4 million in cash, and it's had a big run-up this year that doesn't seem to be justified by fundamentals.

On the other hand, David Einhorn, one of The Guru Five, is the largest investor in BAGL², so bear that in mind. For my part though, I'm not going to let a guru's ownership of a stock keep me from shorting it. I did that last year, when I was bearish on USG, but didn't short it because Warren Buffett owned it. These guys put their pants on one leg at a time like the rest of us, and they often have different considerations than the rest of us do with these sorts of positions.


¹Z"-Score is the designation for the modified, four-term version of the model recommended for publicly-traded (non-financial) non-manufacturing companies.

²Einhorn appears to have acquired his stake when he helped recapitalize the company after its bankruptcy, so his average cost here is probably very low. I don't have the energy to look up the exact figures, but feel free to do so yourself if the spirit moves you.

Update on VBDG

In a post in March ("Applying the Altman Z-Score Model to a Non-Manufacturing Company"), I mentioned a company called Vertical Branding (at the time it was on the OTC BB; now it's on the Pink Sheets: VBDG.PK). I noted at the time that the Altman Z-Score model predicted bankruptcy for the firm and that when I had shared this information with the folks on the Investor Hub message board for the stock, I had gotten the Enemy of the People treatment. Since then, in addition to getting kicked to the Pink Sheets for not filing its financial statements, the stock has dropped 50%.

A few days after that March post I was indefinitely banned from Investor Hub's VBDG message board. The moderator who banned me was the plaid-shirted fellow holding the fish in the photo below (the photo comes from his moderator profile on Investors Hub).

Update: I didn't note this at the time, but this fellow happens to be Matt Brown, the lead site administrator of Investors Hub, who was recently indicted on criminal securities fraud charges, and remains free on a $50,000 bond posted by his father.



This illustrates one challenge in managing stock message boards. You need some form of moderation to minimize spam and other comments that detract from a board, but when you give the authority to moderate to an individual, such as the fellow pictured above, you are forced to rely on his assessments, and if your moderator's assessments aren't objective¹, you risk losing informative posts. I believe there is a better way to moderate stock message boards, but that will be a subject of a future post.

¹E.g., perhaps he is long the stock and is biased against bearish posts?

Things to Come

A few things I'm considering posting on that I haven't gotten around to writing yet, due to time constraints:

- What the conservative NJ firebrand Steve Lonegan and the liberal D.C. blogger Matt Yglesias have in common.

- The challenges of predicting default for financial firms: why the Altman Z-Score model isn't recommended for financials and the limitations of alternative, market-based models.

- Looking at a couple of recent bankruptcies, e.g., that of Eddie Bauer: would the Altman Z-Score model have predicted bankruptcy two years ago?

Alloy Steel's 10-Q

Alloy Steel International (OTC BB: AYSI.OB) filed its 10-Q today (summary; full filing). Another break-even quarter: $39,000 of net income on $1,479,774 of sales. As I mentioned in a recent post ("Run Silent, Run Deep"), I had expected a loss this quarter, so I'm (mildly) pleasantly surprised the company was able to break even during what might turn out to have been the worst quarter of the current global recession. Judging from the price action today though, others had higher expectations. Management offered this comment on the quarter and the company's prospects going forward:

The decrease in sales for the period is representative of the general downturn being experienced in the world economy. The number of orders received by the Company have declined as demand for our product reduced as various mining companies announced that new mining projects were being delayed and/or existing mining projects were being wound back until demand for commodities increased. The Company has submitted tenders for the supply of Arcoplate where possible and is confident that these will be successful with orders likely to be received in the next three to six months. The Company has continued to promote its product in the market place as a superior option for maintenance, as well as seeking entry into other markets which were previously limited by the Company’s ability to meet the demand existing prior to the economic downturn. The Company is confident of being able to present its product well in these new markets, and anticipates additional orders will be generated from these new locations.

Updated Altman Z-Score for Alloy Steel

In a previous post ("Using the Altman Z-Score to Calculate the Risk of a Company Going Bankrupt"), we described the Altman Z-Score model for manufacturing companies:

The Altman Z-Score is a model developed in 1968 by NYU Finance professor Edward Altman (pictured above) to predict the likelihood of a company going bankrupt within the next two years. According to Investopedia,

[R]eal world application of the Z-Score successfully predicted 72% of corporate bankruptcies two years prior to these companies filing for Chapter 7"

In creating the Z-Score model, Professor Altman studied an initial sample of 66 firms, half of which had gone bankrupt, and looked for the balance sheet and income statement ratios that had the most predictive value. Dr. Altman settled on these five ratios¹:

T₁ = Working Capital / Total Assets
T₂ = Retained Earnings / Total Assets
T₃ = Earnings Before Interest and Taxes / Total Assets
T₄ = Market Value of Equity / Total Liabilities
T₅ = Sales/ Total Assets

He then assigned weightings to them based on their predictive values to create his model:

Z Score Bankruptcy Model:

Z = 1.2T₁ + 1.4T₂ + 3.3T₃ + .6T₄ + .999T₅

Based on this model, a Z-score below 1.8 means bankruptcy is likely within two years; a Z-score between 1.8 and 2.99 is a gray area; and a Z-score above 2.99 means there is little likelihood of bankruptcy within the next two years.

In that post, we noted that the Altman Z-Score for Alloy Steel at the time was 4.89. I re-ran the calculation today using the updated numbers and got an Altman Z-Score of 4.19. Unsurprisingly, it's lower than last time, given the drop off in sales and earnings, but still well above the 2.99 level, above which the model predicts little likelihood of bankruptcy within the next two years.

Applying the Altman Z-Score Model to Mining Companies

Tools and ideas for short sellers, including an automated calculator and screener based on the Altman models.

In a couple of recent posts ("Using the Altman Z-Score Model to Calculate the Risk of a Company Going Bankrupt" and "Applying the Altman Z-Score Model to a Non-Manufacturing Company") we discussed the use of the original, five variable model for manufacturers and the modified model for non-manufacturers. Recall that the modified Altman Z-score model for non-manufacturers excludes the fifth variable in the original model (sales/total assets), to account for different levels of capital intensiveness among non-manufacturers.

Since mining companies, like manufacturers, are also capital intensive, I asked Dr. Altman via e-mail which of his models would be best for miners. His response:

Try both, but probably the 4 variable model is more appropriate.

The photo above, of a copper smelter, is from the website of the Canadian mining company Hudbay Minerals.

Applying the Altman Z"-Score Model to a Non-Manufacturing Company

Tools and ideas for short sellers, including an automated calculator and screener based on the Altman models.

In a previous post ("Using the Altman Z-Score to Calculate the Risk of a Company Going Bankrupt") I used Altman's original model on a publicly-traded manufacturing company. On Tuesday I used the Altman Z-Score model on a publicly-traded (micro cap) non-manufacturing firm, Vertical Branding, Inc. (OTC BB: VBDG.OB), the marketer of such fine products as the "MyPlace Cozy" lap table, pictured above. I had seen this company mentioned as top pick by a few regulars on the Investor Hub website. Initially, I used the original Altman Z-Score model -- which was designed for manufacturers -- on Vertical Branding. Recall from our previous post on the subject, that the original Altman Z-Score model uses these five terms:

T₁ = Working Capital / Total Assets
T₂ = Retained Earnings / Total Assets
T₃ = Earnings Before Interest and Taxes / Total Assets
T₄ = Market Value of Equity / Total Liabilities
T₅ = Sales / Total Assets

And weights them this way:

Z Score Bankruptcy Model:

Z = 1.2T₁ + 1.4T₂ + 3.3T₃ + .6T₄ + 1T₅

Using an online calculator based on the original Altman Z-Score model, I got a score in the "distress" zone, one that indicated that bankruptcy was likely within two years¹. I mentioned this on Vertical Branding's Investor's Hub message board. Unsurprisingly, I got the penny-ante version of the Enemy of the People treatment for my trouble. I did get one legitimate criticism though, that I had used the Altman Z-score formula designed for manufacturers. So I ran the numbers again using Ironwood Advisory's online calculator, which gives the option of selecting for non-manufacturing companies. That option uses the modified Altman Z"-score model, which uses only the first four terms used in the original multivariate formula, and eliminates the fifth variable, sales/total assets, because this variable varies widely among non-manufacturing firms, which tend to be less capital-intensive. The Altman Z"-score model weights the first four variables differently:

Modified Altman Z"-Score Bankruptcy Model:

Z = 6.56T₁ + 3.26T₂ + 6.72T₃ + 1.05₄

Using the calculator set for non-manufacturing companies produced an even worse Z-score than the original model did. This was consistent with Penn State Accounting Professor Gregory Eidleman's observation that the original Altman Z-score model can under-predict bankruptcy of non-manufacturing companies. After correcting an apparent data-entry error on my part, I got an Altman Z"-score of -4.30 for VBDG. For non-manufacturing firms, any score below 1.1 is an indication that the firm is at risk of bankruptcy within two years.

Coincidentally, on Thursday morning Vertical Branding filed an 8-K noting that it was in continuing negotiations to restructure its debt and that the company's board of directors had authorized its management to

[E]valuate and pursue all strategic opportunities available to the Company, including the potential sale of the Company.

On this news, VBDG dropped 31%.

¹This makes intuitive sense, if you look at the company's income statements and balance sheet: the company has negative earnings before interest and taxes (EBIT), negative retained earnings, and negative working capital; essentially, it's a money-losing, debt-laden company.

Using The Altman Z-Score to Calculate the Risk of a Company Going Bankrupt

The Altman Z-Score is a model developed in 1968 by NYU Finance professor Edward Altman to predict the likelihood of a company going bankrupt within the next two years. According to Investopedia,

[R]eal world application of the Z-Score successfully predicted 72% of corporate bankruptcies two years prior to these companies filing for Chapter 7"

In creating the Z-Score model, Professor Altman studied an initial sample of 66 firms, half of which had gone bankrupt, and looked for the balance sheet and income statement ratios that had the most predictive value. Dr. Altman settled on these five ratios¹:

T₁ = Working Capital / Total Assets
T₂ = Retained Earnings / Total Assets
T₃ = Earnings Before Interest and Taxes / Total Assets
T₄ = Market Value of Equity / Total Liabilities
T₅ = Sales/ Total Assets

He then assigned weightings to them based on their predictive values to create his model:

Z Score Bankruptcy Model:

Z = 1.2T₁ + 1.4T₂ + 3.3T₃ + .6T₄ + .999T₅

Based on this model, a Z-score below 1.8 means bankruptcy is likely within two years; a Z-score between 1.8 and 2.99 is a gray area; and a Z-score above 2.99 means there is little likelihood of bankruptcy within the next two years.

There are several free Altman Z-Score calculators available online to facilitate the use of the model. There is also a fully-automated Altman Z-Score calculator (where you just need to enter a company's symbol and the calculator does the rest) at Shortscreen.com. I used the one at Ironwood Advisory's website to calculate an Altman Z-Score for Alloy Steel International (OTC BB: AYSI.OB). The calculator gave a Z-score of 4.89, and included this commentary:

Your Z score is in the high range. This company is in good financial health and is predicted to remain solvent for the next two years. Smaller firms should note that these models are based on data from firms with assets in excess of $1,000,000². If it is believed that asset size affects Z scores, then their use may not be appropriate.

The photo above of Professor Altman comes from the CFA Institute.

¹The components and weightings of Altman's model come from Wikipedia.

²Alloy Steel's total assets are approximately $7,030,000 and its net assets are $4,393,000.