Shadow Stocks » Pairs trades

Revisiting an Altman Z”-score pairs trade

David Pinsen — Tue, 06 Apr 2010 04:33:40 +0000

Back in January, on the old blog, I mentioned this Altman Z”-score pairs trade:

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.

I had a sell stop limit order on the OII, and when it hit within a couple of weeks, I went ahead and covered the short of TRMA, as I mentioned on the Short Screen message boards at the time. I netted a small gain on the pairs trade (6.5%), but, in hindsight, I would have been a lot better off letting both positions ride. See the graph below.

TRMA versus OII

New short position: BEXP I have been thinking about Brigham Exploration Co. (Nasdaq: BEXP)...
New short position: USG Shorted sheet rock company USG today at $12.45. As I...
That didn’t work “That” being shorting Brigham Exploration Co. (Nasdaq: BEXP) at $13.11...

Related posts brought to you by Yet Another Related Posts Plugin.

Short Screen updates

David Pinsen — Sat, 27 Feb 2010 02:17:55 +0000

On Steam Catapult, a summary of recent changes to the site. Related posts:Free trials of Short Screen and Portfolio Armor For financial professionals, later today. More details on Steam Catapult....Pricing Note on Short Screen and Portfolio Armor On or about February 18th, we’re going to raise the...On the Short Screen message boards “Value Micro” asks questions [...] Related posts:

Free trials of Short Screen and Portfolio Armor For financial professionals, later today. More details on Steam Catapult....
Pricing Note on Short Screen and Portfolio Armor On or about February 18th, we’re going to raise the...
On the Short Screen message boards “Value Micro” asks questions about ROIAK and BAGL. I take...

Related posts brought to you by Yet Another Related Posts Plugin.

Comment contest winners

David Pinsen — Fri, 26 Feb 2010 07:05:16 +0000

Comment contest winners are listed on Steam Catapult (Philippe, you’re one of the winners, so be sure to click over there).

Sorry for the paucity of posts here recently. I was thinking of buying another speculative stock this week, but held off on that, so I didn’t post about it. Perhaps I will add a short post on it anyway. In the meantime, I did leave a few comments about hedging and shorting in this thread on GuruFocus this week, if you’d like to check them out.

Technical Analysis It’s worth checking out the comments about technical analysis in...
A quick note about Nanologix [caption id="" align="aligncenter" width="512" caption="5 day chart for NNLX"][/caption] I...
SPY Update In a post last week, I mentioned that the cost...

Related posts brought to you by Yet Another Related Posts Plugin.

That didn’t work

David Pinsen — Wed, 10 Feb 2010 20:36:38 +0000

“That” being shorting Brigham Exploration Co. (Nasdaq: BEXP) at $13.11 on 1/28. As I mentioned at the time, shorting BEXP was sort of a pairs trade in that I was already long U.S. Energy Corp (Nasdaq: USEG), which is participating in a series of oil wells with BEXP in the Bakken formation. After the close the following Monday (on 2/1), BEXP announced positive drilling results in two Bakken wells that USEG is not participating in.

In an attempt to limit my risk, when I shorted BEXP I had set a stop limit buy order with the limit price a little less than 10% above the price where I shorted the stock. BEXP shot through my limit price in after hours trading that Monday and made a new intra-day 52-week high the next day, trading as high as $15.80¹. Looking back at the last time the company announced positive drilling results (on 1/5), I noticed that it had spiked up in price on the news, only to give back those gains a few days later. So I figured I’d let the stock settle down a bit before covering.

Later last week, I got a little greedy and canceled my stop limit order, thinking general market weakness might give me a second chance to make money on this short before the company announced additional positive drilling results. Last night, I thought better of that and entered a new limit order. I covered BEXP today at $14.35 for a 9.5% loss. USEG is up 7.9% since I shorted BEXP, so had this been an actual pairs trade (had I bought USEG at the same time², and sold it today) it would have been for a 1.6% loss.

¹This highlights a limitation (no pun intended) of limit orders: you have no assurance of getting them filled at your limit price or better; only options guarantee you the right to buy or sell a security at a specified price.

²I first bought USEG about a year and a half ago, at $2.85. I bought more later in the $2.70s, making my average cost about $2.80.

New short position: BEXP I have been thinking about Brigham Exploration Co. (Nasdaq: BEXP)...
USEG files its 10-K [caption id="" align="aligncenter" width="512" caption="One year chart for USEG"][/caption] U.S....
Revisiting an Altman Z”-score pairs trade Back in January, on the old blog, I mentioned this...

Related posts brought to you by Yet Another Related Posts Plugin.

Pricing Note on Short Screen and Portfolio Armor

David Pinsen — Sat, 06 Feb 2010 01:29:43 +0000

On or about February 18th, we’re going to raise the membership fees on both Short Screen and Portfolio Armor; we’re doing some analysis now to determine the exact amounts of the increases. Current members of the sites will be grandfathered and will continue to pay the current membership fees, for as long as they remain recurring members.

Short Screen prices going up for new members [caption id="" align="aligncenter" width="250" caption="The Short Screen bear on the...
Free trials of Short Screen and Portfolio Armor For financial professionals, later today. More details on Steam Catapult....
Star Trek: TNG and Portfolio Armor I used a Star Trek: The Next Generation reference in...

Related posts brought to you by Yet Another Related Posts Plugin.

New short position: BEXP

David Pinsen — Thu, 28 Jan 2010 18:36:29 +0000

I have been thinking about Brigham Exploration Co. (Nasdaq: BEXP) off and on since last August, when U.S. Energy Corp (Nasdaq: USEG) entered a drilling participation agreement with Brigham in Brigham’s Bakken oil properties. Today I shorted BEXP at $13.11. Because BEXP was in financially dicey straights back then (it had an Altman Z”-Score¹ in the distress zone. ), and was coming up on a drilling deadline, cash-rich, prudently-managed USEG was able to enter this deal on favorable terms. As I have mentioned on my previous blog, USEG has a number of other irons in the fire besides its drilling participation deal with BEXP (e.g., its geothermal investment, its molybdenum property, its uranium properties), but it’s been the BEXP deal that has largely driven USEG’s stock price since the deal was announced. See how USEG’s stock price starts moving at the end of last August:

USEG versus BEXP

Since I shorted a dollar amount of BEXP equivalent to my long position in USEG, and since both stocks have been moving in recent months mainly on news of their shared Bakken deal, this is essentially a pairs trade (USEG was trading at $5.07 when I shorted BEXP today, but my average cost on USEG is about $2.80). Currently, USEG has an Altman Z”-score of about 12.4 and BEXP has an Altman Z”-score of about -2.6. Scores above 2.6 are considered to be in the safe zone, and scores below 1.1 are in the distress zone .

¹Recall that Professor Edward Altman created his original Altman Z-score model to predict the default risk of manufacturing companies. In its initial test, the Altman Z-Score was found to be 72% accurate in predicting bankruptcy two years prior to the event, with a Type II error (false positives) of 6% (Altman, 1968). In a series of subsequent tests covering three different time periods over the next 31 years (up until 1999), the model was found to be approximately 80-90% accurate in predicting bankruptcy one year prior to the event, with a Type II error (classifying the firm as bankrupt when it does not go bankrupt) of approximately 15-20% (Altman, 2000). The Altman Z”-Score is Professor Altman’s modified formula designed for application to non-manufacturing firms. For more on the Altman Z”-Score, including an example of it in action, please see Applying the Altman Z”-Score Model to a Non-Manufacturing Company.

Revisiting an Altman Z”-score pairs trade Back in January, on the old blog, I mentioned this...
That didn’t work “That” being shorting Brigham Exploration Co. (Nasdaq: BEXP) at $13.11...
New short position: USG Shorted sheet rock company USG today at $12.45. As I...

Related posts brought to you by Yet Another Related Posts Plugin.