James Montier recently
produced a list of stocks that could result in a 'permanent loss of
capital' for investors. He focused on valuation risk, earnings risk,
and financial risk. Losses could arise from any one of these risks.
Stocks with all these risks may be particularly shaky.
More quantitatively, here are Montier's tests . . .
Price to 10-year average earnings ratio > 16
(I also included stocks with negative ratios.)
EPS(ttm) > 2 times average EPS over the last 10 years.
Altman Z < 1.8
I happened to be near my friendly neighbourhood Bloomberg terminal and
looked for Canadian stocks that fit Montier's high-risk criteria.
Name Price AltmanZ P/E P/E10
=================== ====== ======= ===== ======
BAM (BNB) $10.00 1.75 12.05 -83.33
ENBRIDGE (ENB) $40.46 1.66 11.12 24.37
INTER PIPE (IPL.UN) $7.64 1.05 7.64 36.38
CLUBLINK (LNK) $6.49 0.67 25.96 64.90
Source: Bloomberg Jan 28, 2009
I admit to having some reservations about the list. The Altman-Z
score was developed for manufacturing firms. It isn't as good when
dealing with other industries. It strikes me that regulated utilities
may well be safer (on the financial risk front) than their Altman-Z scores
indicate. (An Altman-Z score of less than 1.8 indicates that there is a high
risk of bankruptcy in the next 2 years.)
Similarly, Clublink is actually a real estate firm (golf courses) and
BAM is an investment company. As a result, I'd not rely on their Z
So, it's an interesting but imperfect list.