Zacks Bull of the Day Highlights: Stone Energy
Thursday December 17, 2009, 8:26 am EST

Chicago, IL – December 17, 2009 – Zacks Equity Research highlights Stone Energy (NYSE: SGY – News) as the Bull of the Day.

Full analysis of all these stocks is available at http://at.zacks.com/?id=5506
Bull of the Day:

We recommend an Outperform rating for Stone Energy (NYSE: SGY – News) shares following strong third-quarter 2009 results. Stone has moved away from liquidity management in the first half of 2009 to a disciplined organic growth mode.

The Gulf of Mexico (GoM) shelf helped the company deliver a strong quarter, underpinned by both production growth and decreased cost. Last year's acquisition of Bois d'Arc Energy, a pure-play GoM player, has increased Stone's footprint in this region.

Our favorable view of the stock reflects the company's improving balance sheet, positive production growth profile, decreasing cost and improved prospects for capital discipline.

It's certainly possible that the Altman Z”-score won't be predictive in the case of SGY. It's not accurate all the time. But as I mentioned, VectorVest rates SGY a sell. VectorVest's system may not be predictive either, but it shows that different model is similarly bearish about SGY.

Instead of guessing it's flat wrong, why not run it manually and see what the impact is, if you're interested? It may be that the market value should be more heavily weighted, in general. One material effect of the huge recovery rally is that it made additional capital available to a lot of distressed companies that would have been in trouble without it.

“I've read all the papers you put on this site re Altman, and it seems to me that the goal is really to capture the problems that are causing a company to potentially fall into bankruptcy.”

Then you know the models were developed with multiple discriminant analysis — not a subjective assessment of which factors were more likely to signal bankruptcy. The results appear counter-intuitive to me sometimes. For example — and this actually came up in a phone conversation with a Short Screen premium member yesterday — one of the most-distressed companies on the site is there solely because of a hugely negative retained earnings figure. Those negative retained earnings are the result of losses that happened more than one year ago, which is an example of how the models can be impacted by events that happened prior to the TTM.

Also, more generally — and I may have made this point to you before — in my observation, Altman scores tend to be less volatile than you might expect in the face of an awful quarter or two. Alloy Steel, for example, stayed in the positive zone even after a couple of awful quarters about a year ago.

“I understand your desire to defend the models (and, as a by-product the new site)”

Just to clarify, the new site (Portfolio Armor) has nothing to do with the Altman models. And the Altman models certainly aren't perfect — they do have their weaknesses. But I researched other models in the course of developing Short Screen, and I found the Altman models to be the most robust for the purposes of the site. That doesn't mean that I always short or buy puts on a stock just because it has a low Altman score. I usually use the screener as a starting point for my research and then look for some other supporting data.

That anomalous Q4 08 quarter really makes me doubt the validity or predictiveness of the Altman score for SGY right now.

Watch them announce a secondary offering tomorrow now….

Anyway, you get my point.

I understand your desire to defend the models (and, as a by-product the new site), and I think that every quarter that goes by makes the model *more* useful because the companies will be measured in what may be a more typical environment. At the same time, I don't think that your unwillingness to recognize a potential serious weakness about the models in the short term is justified by what was the economic reality of the past 18 months, and the effects thereof on the inputs to the model.