High Stockrank + High Bankruptcy

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13th Oct '16 by Bushranger

15 comments 6279 reads

I'm looking at a stock with high Stockrank, very high, but its bankruptcy level is almost distress. I find it hard to square a high Stockrank with a high bankruptcy risk? Would this not be reflected in the quality rating?

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Bushranger

Premium Member

15 comments

Rusty2

13th Oct '16

Which share is it?

It is one thing that I do have a problem with Stockranks is high debt and high pension deficits are not taken into account enough, this shows up in some high value shares such as Communisis (LON:CMS), that's partly why the share price is low. I have also noticed that the F score can be high but the Altman Z-1 score can be very low but yes they are used in the quality scores.
This has been discussed in another post recently, I think it was the one about about pension deficits to SR.

Bushranger

13th Oct '16

HMSG. I had been looking at it for a few days as it has been high in stock ranks but was put off by bankruptcy status. It had a good rise today though still low PE. Sorry I cant find how to link the stock name.

PJ0077

13th Oct '16

Two of the nine factors that comprise the Quality rank reflect Balance Sheet strength.

So a stock with a weak Balance Sheet but high Quality rank &/or Stockrank must be scoring very highly elsewhere.

Personally I screen for a high Stockrank AND a high AltmanZ score to screen out weak Balance Sheets.

Rusty2

13th Oct '16

Yes I thought it may have been that one, you just put £ before the HMSG, HMS Hydraulic Machines and Systems (LON:HMSG).

Yes I had a look at that one also but the high debt put me right off. It's also Russian.

Bushranger

13th Oct '16

I guess the complexity of companies can't just always be rolled into one score. As a newbie to Stockapedia I wanted to make sure I wasn't misreading that it was not in great shape financially currently.

Bushranger

13th Oct '16

I'm not put off by it being Russian, though riskier. But it was the debt that has put me off too. Because it has such a high Stockrank I wanted to check if I wasn't misreading something.

Rusty2

13th Oct '16

I would be wary of foreign companies listed in London, especially on the Aim, in particular chinese ones, many have gone bad. High debt in a recession is not a good thing.
Interestingly my broker do not list this stock.

rhomboid1

14th Oct '16

Re HMS Hydraulic Machines and Systems (LON:HMSG) there's a results presentation on their website that is quite interesting, I looked at it as double geared play on oil, if oil goes higher so does the rouble and their core business booms as well. Key issues were debt and the potential for de listing or other Russia related special risks.

lightningtiger

15th Oct '16

Can't be traded with Hargreaves Lansdown because it is not listed & Herbie47 has the same findings. Bid & offer spread about 5% which is high & no recent dividends paid, which is bad news.
Great share chart with excellent momentum but not much point if it can't be traded. There must be a good reason for it..Not listed in Vector Vest either.

Looks as though it can be traded at interactive investor but with only 995 shares traded today and a higher bid offer spread could be more bad news if you wanted to sell.Too many red lights on this share for me.

Edward Croft

15th Oct '16

Bushranger - you'll find the question best answered in this article I wrote some time back.

http://www.stockopedia.com/content/how-to-think-ab...

Check out the section on the distress zone - which I'll quote here...

Understanding the distress zone
There has been a lot of discussion lately about the fact that Wincanton has a StockRank of 98/100 when it 'shouldnt'. Our own Paul Scott has been vociferous in his criticism of the company. "A terrible company with an incorrectly high StockRank. They capitalise a large chunk of their payroll into the balance sheet. This is one of the worst companies I've drilled into. It getting a StockRank of 98 is a serious worry."
Wincanton is highly levered and clearly labelled with a high risk of bankruptcy on the StockReport. So why should a stock like this still have a StockRank of 98/100 ? Well it's simple. Firstly, the QualityRank is only one third of the overall StockRank. If a stock is cheap AND has high momentum then the ValueRank and MomentumRank will outweigh low QualityRank scores. None of the StockRanks trump one another - they are all equally weighted. In fact, according to all the academic literature, quality as a factor is less predictive than value or momentum.
My own biggest worry about the StockRanks is whether we should be weighting Quality as highly as we do... as there's plenty of research that suggests that we shouldn't.Secondly, and more specifically, while financially distressed stocks as a whole tend to underperform the market, there is a subset of these stocks which do recover. There are various techniques for separating the wheat from the chaff amongst bargain stocks which we've discussed in our ebook "How to Make Money in Value Stocks".
One of the best ways to do this is to measure the trend in the fundamentals - whether they improve or continuing to deteriorate. We do this using a nine point checklist called the Piotroski F-Score - companies with improving fundamentals score up to 9, deteriorating fundamentals as low as zero.The QualityRank is designed to score the quality of a company's franchise (stability, profitability and growth), in tandem with its fundamental trend (F-Score) and its riskiness (financial and earnings quality).
The bankruptcy risk is only 1 factor in what we call a multi-factor approach. So the baby is not thrown out with the bathwater in the instance that a company is flagging red on only one signal. It will be thrown out when it's flagging red on them all. The fact that a stock like Wincanton has a positive fundamental trend balances the bankruptcy risk in the scoring system.While Wincanton may of course go bust, there are no certainties in investing. Statistically, Trinity Mirror was another stock with a very similar StockRank profile (high bankruptcy risk, but strong fundamental trend and price momentum) which more than quadrupled in price... so...

Wincanton has been ranked in the high 90s since 2013... and it's risen 79% since we began to have criticism over its ranking. And there are other similarly high bankruptcy risk stocks, with high rankings, that have similarly done well (Trinity Mirror immediately springs to mind). So there's certainly some merit in our methods. Wincanton's ranking has started slipping (it's 89 now) so I'd be happy to bank those gains given the clear higher risk.

Rusty2

15th Oct '16

Yes these companies have done quite well in the last few years but come a recession these are the ones more likely to be in trouble. Re Wincanton (LON:WIN) I follow not followed it but I think they are better off now financially than they were, debt has reduced and profits are up. Companies with high debt and low Piotroski F-Scores are easy enough to screen out, if that's someone you don't want in your portfolio. Companies with high debt can get away with it in a bull market and low interest rates but beware if there is a recession. Re Trinity Mirror (LON:TNI) I disagree it has done well, in last 18 months the share price has fallen from around 200p to 90p today.

Rusty2

15th Oct '16

As I mentioned before some companies with high AltmanZ scores also have very low Piotroski F-Scores, I would screen for both.

Rusty2

15th Oct '16

Ed, the other issue is value scores, some are very high because of balance sheet issues, so these do not seem to have a large effect on the Quality score it can have a large effect on the Value score, Communisis (LON:CMS) is one that springs to mind. So yes some of these can have a high QV score.

Edward Croft

15th Oct '16

High ValueRank stocks (and a great many high QV stocks) tend to be pretty ugly companies. Deep value investing requires investors to delve where others don't like to... it certainly isn't for widows & orphans. Personally it's why I prefer sticking to higher momentum shares...

DWit199

16th Oct '16

HMS Hydraulic Machines and Systems is traded on the International Order Book. I have asked before about excluding these companies from screens since they are clearly different from a "normal" full listing but it is impossible to identify this from the stockreport.

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High Stockrank + High Bankruptcy

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Bushranger

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