Altman Z-score & Piotroski Score

      

If you are still reading this blog, then welcome me back. I just realized i have no blog post for September 2011. It worries me. No post means I haven't tried reading or learning anything new for September. 

So before the remaining three months of year 2011 is over, I'll try to post as much as I can and learn new things or reinforce learnings in the process.

For October, i want to apply Altman Z-score in companies i am currently invested in for analysis. If you have been following the Philippine Stock Market, you know that most of the stocks are in red. The stock market has been going up and down that most of us don't know whether we are in bear market or bull market. Personally, i think we are still in the bull market given the good financial performance reported by Philippine Companies for the first half of 2011. Nevertheless, my portfolio is also in red so don't trust me too much.

Having said that, we should never forget how important to look at solid companies in investing. Using the fiscal fitness analysis or more known as Altman Z-Score, let's see how my favorite companies fare. Hopefully, through this process, I will learn and convince myself more of being a good investor.

Altman Z-Score

My first encounter with Altman Z-Score was back in 2009 during my refresher course in Finance Subjects. The professor was a believer of this formula and informs us that it is a good basis for predicting bankruptcy of companies. Here's what wikipedia has to say about this formula

From wikipedia The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.

This post will not be about whether Altman Z-Score works but rather how Semirara Mining Company (SCC) fares in this formula

Using the 2011 PSE Quarterly filing, SCC scores 3.51 which is above the safe zone. In other words, SCC is a safe company to invest in.

Piotroski Score

From GrahamInvestor.com University of Chicago Accounting Professor, Joseph Piotroski reasoned that because value stocks are by definition often troubled companies, many will not possess the financial resources to recover. Consequently, Piotroski wondered if it was possible to improve the performance of a value stock portfolio by eliminating stocks that were the weakest financially.

Piotroski devised a simple nine-criteria stock-scoring system for evaluating a stock's financial strength that could be determined using data solely from financial statements.

One point was awarded for each test that a stock passed. Piotroski classed any stocks that scored eight or nine points as being the strongest stocks. His findings were that these strong stocks as a group outperformed a portfolio of all value stocks by 7.5% annually over a 20-year test period. Piotroski also found that weak stocks, scoring two points or fewer, were five times more likely to either go bankrupt or delist due to financial problems.

Using the 2011 PSE Quarterly filing, SCC scores 9 points using Piotroski Score

Conclusion

SCC passes both the Altman Z-Score and Pioroski Score. Nevertheless, these numbers are not enough. I wanted to apply industry analysis on SCC only that I am not yet familiar with the competitors. I'll read last year's annual filing and see if I can learn more about the company and its industry. Once i know the competitors, I'll do industry wide analysis.

Quotes Part III

Stop making excuses & start making progress. What you imagine, you can begin. Want you begin, you can finish


Worrying that there's not enough time leaves you with even less time.
The only difference between a Good Day And a Bad Day Is your Attitude ~Dennis S Brown


Try not to become a man of success, but rather try to become a man of value." - Albert Einstein


Try not to wait for others to motivate you....be the motivation


A man is what he thinks about all day long." - Ralph Waldo Emerson


The only limits are the ones you place on yourself


Nothing can sabotage winning, except for fear of losing. Success usually lies just beyond failure." Cortes 


You never achieve success unless you like what you are doing. ~ Dale Carnegie

Life is what we make it, always has been, always will be.Life is what we make it, always has been, always will be.Life is what we make it, always has been, always will be.

Quotes Part II

• Be proactive. Do what must be done long before it must be done & have much more time to do what you love to do

• To be a great champion you must believe you are the best. If you're not, pretend you are. -Muhammad Ali
  

• If it's important to you, you will find a way. If it's not important to you, you will find an excuse
  

• Vision really boils down to learning, and learning really boils down to passion
  

• What you do speaks so loud, I cannot hear what you say - Ralph Emerson
  

• WHAT WINNERS KNOW: Many people just do the minimum. Every extra step you take puts you that far ahead of the crowd
  

• There are those who talk endlessly about what they're going to do. Then there are those who get busy and do it
  

• Habit is a cable; we weave a thread of it each day, and at last we cannot break it
  

• You have to expect things of yourself before you can do them — Michael Jordan
  

• Success lives in the effort, in the experience, in the learning, in the growing, not in the rewards
  

Quotes Part I

The best motivation is to constantly keep yourself in contact with your reasons

Be brave and steadfast; have no fear or dread of them, for it is the LORD, your God, who marches with you; He will never never fail you or forsake you Dt 31:1-8

We need to stop listening to our excuses and realize that the only thing stopping us is us

Whatever happens, take responsibility. ~ Tony Robbins

Remind yourself again & again of why you must. Hold your head high & keep your eyes on the goal

Motivation is what gets you started. Habit is what keeps you going.~ Jim Ryun

Improvement begins with I —Arnold Glasow 

Diligently and effectively put forth your best effort, without concern for the result. It will be worth your while

Once you know what's causing the result you don't want, you'll have a strategy for creating what you do want

The secret of getting ahead is getting started." ~ Sally Berger

Review of Banking Firms

Industry:Banking and Financial

Stock Pick: China Bank Corporation

This is the second part of my take in applying my skill of reading numbers and ratios to my stock trading. 

If you haven't read the first part, read it here. You need to read the first part for quick explanation for the basis of the analysis.

Using the same process, the stock pick is CHIB or China Bank Corporation. The stock has figures above industry averages. 

Again, without following the point system, i'll go for SECB for posting 47% net profit margin coupled with 20.93% sales growth. 

The only thing that worries me is the negative cash flow from operations.

I don't own any stocks from the banking sector. I use to hold MBT but i have sold it and took profits. I bought it when it was still trading at 67 and took profits after reaching P76.

Right now, i don't have excess funds to invest but if I have additional cash, I'll probably put it in SECB then CHIB.

Review of Property Firms

Industry: Property

Stock Pick: Robinson Land Corporation

I have never really tried applying my knowledge about financial ratios or accounting skills in trading stocks. In the past, i relied on news, stock tips on forums and gut feel. So this is the first time I am doing this and by tomorrow, I'll post my first buy order for RLC. Just want to write it down here so I'll remember and determine after six months, if making an analysis is worth it.

First, let me explain the table above and each of the column,

STOCK - This column pertain to the ticker symbol of each of the public corporation engaged in the property business listed in Philippine Stock Exchange.

Price - This column is the closing price of the stock as of August 1, 2011.

COL Rating - This column pertain to my stock broker recommendation for the stock as of August 1, 2011.

Target Price - This column is the target price for the stock. The stock may or may not reach this price.

Upside - This is the potential return of the stock. The difference between the target price and stock price over the closing price. 

Sales Growth - This column pertain to sales growth forecast for 2011. This is important because we want to get in the company that is getting the big chunk of the industry's revenues. Sales is the starting figure and it is important that a company continue to increase its sales. 

Net Profit Growth - The company not only need to earn revenues but must also exhibit improving margins. It is not favorable to us investors if the company is increasing its sales and with it goes the expenses. A good company should be able to control costs.

Net Profit Margin - This ratio shows what percentage of sales is eventually reported as a profit after deducting the company's expenses. The industry's average is 29%. This means that for every peso of sales, the company has to spend 71% for expenses. We want to choose higher profit margin as much as possible. 

Cash Flow Operating - This shows how much cash the operations of the company generates. It is important to look into this number to gauge the liquidity of the company. This is not a hard and fast rule but negative cash flows from operations means that the company might need to obtain cash from creditors or investors to continue its operation. The number above will differ due to the size of the company's operation. For the meantime, just assume that any positive number is good. 

P/E Ratio - Price Earnings ratio means how much an investor is paying for the earnings of a stock. This number shows us how expensive a stock is relative to its competitors. 

Dividend Yield - I would not explain this much but this ratio just shows how much is the yield of a company's dividend relative to its current price. The higher the number, the better.

Now, assuming we consider all the criteria as equal and we give 1 point each time a company statistic is well above the industry's average. We'll get the following points

Based on the analysis, we want to get RLC for exhibiting above average numbers among the industry.

Of course, you can also decide on a single factor alone. Using the potential rewards, SMPH will be the stock choice given its 29% potential upside.

Using P/E ratio, we'll see that VLL is the cheapest among the industry players. 

Using Profit Margin, FLI ranks highest with its 40% margin.

I'm actually half-decided. Without assigning points, I'll go for FLI or MEG. FLI because it is cheap, has the fastest sales growth and high profit margin. 

MEG because it is the cheapest and has 25% upside potential. 

Right now, i own VLL, MEG and ALI. I don't own FLI and RLC and based on the ranking above, i should get these two. I only have P14k free cash in my bpi account. Let's see. I'll try to buy RLC and FLI.

Update: Bought 700 RLC and 6,000 of FLI today, August 3, 2011. Let's see what happens after six months. 

Update on My Mutual Fund

I've been busy thus was not able to post new articles to this blog.

If you happen to read this, then thank you. Most of the time i wonder and I ask myself "Is anyone out there reading my blog beside me, my wife and my brothers)". Truth be told, this blog is aimed at employees like me. Someone who aims to save, earn more and learn. Plus, my entries serves as a reminder to myself.

Like a written contract, this blog serves as a reminder to my forgetful mind; about what i said i'll do, what i have been doing and what i will do next to make sure i reach what i have intended to do.

Without a topic in my mind, i decided to give you an update on my mutual fund.

If you remember, I started putting in a regular amount in a mutual fund. To recap for those who haven't read my previous posts, investing in mutual fund is similar to buying a public company's stock. You  own a certain number of shares based on the amount of your investment. Share price fluctuates depending on the performance of the fund. Performance of the funds depends on the performance of the companies that comprises on the fund. It is becoming an co owner of publicly traded companies indirectly by owning shares of mutual funds. 

I decided to invest following the belief that stock prices increase through time supported by a good company performance. I also invest in the stock market but i don't really have the time and expertise of mutual fund managers so i have decided to try mutual fund.

The table above shows that I've put in P5,000 every month to purchase shares of mutual fund. You'll notice that my P5,000 purchased fluctuating number of shares. That's because share price of mutual fund fluctuates. My P5,000 bought more shares when prices are down and less shares when prices are up. It is worth noting that from Jan - June, the general price trend is upward.  As of this post, the share price (called Net Asset Value per share or NAVPS) is P2.8319 per share. Assuming that today I no longer want to invest, the company who manages the mutual fund will pay me P2.8319 per share (excluding charges). Overall, my money earned 8.5%. Not much but definitely way above what bank deposits offer.

What's Next

I plan to continue putting in P5,000 plus I really need to find another source of income to increase that my monthly investment. If you look at it, my total investment is just enough to buy me an ipad. Not much and definitely low to sustain a living. But it is a start. If you are interested to learn and invest too, comment on this post or follow me on twitter (@accabiao). I don't earn from sharing what I know but more than willing to help.