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Strategies & Market Trends : The Rational Analyst -- Ignore unavailable to you. Want to Upgrade?

To: HeyRainier who wrote (1551)	3/19/1999 3:27:00 AM
From: HeyRainier	Respond to of 1720

[ Safeskin: SFSK ] Ahh yes. An analyst who does the job right by reading between the numbers correctly. Good job to the Solomon Smith Barney analyst in the following link: exchange2000.com Safeskin is a classic case of watching Sales versus Receivables and Inventory growth, and how an imbalance can adversely affect earnings--particularly if the company derives most of its revenue from a concentrated product line. You can find references to these imbalances in one of my earlier posts about Sunbeam (SOC). It seems strange that given the remarkable ability for these imbalances to correctly forecast earnings shortfalls, that more professional money managers are not including short positions in their portfolios, because from the perspective of an efficient portfolio (one that maximizes return for a given level of risk), studies of risk/reward relationships show that portfolio volatility can be greatly dampened by including short positions in one's portfolio, in exchange for only a slightly lower level of expected return. If you pick your crummy stocks right and do your homework, however, I believe in some cases that the dampened volatility can be attained while still avoiding the cost of a lower level of expected return. This would sound like an economic Free Lunch, but in fact, it's not. You pay for your lunch to the extent that you do your homework. RT

To: HeyRainier who wrote (1551)	3/19/1999 3:54:00 AM
From: HeyRainier	Read Replies (1) \| Respond to of 1720

[ Bankruptcy Predictor: the Zeta Model ] Speaking of forecasting ability, here's a look at something I ran into during one of my 'book raids' at the local bookstore: It's a formula that has been derived from empirical research that attempts to predict the occurrence of bankruptcies. There were two forms given. One, the improved version, was held secret by the company that provides services based on the Zeta Model, and the other one is the basic formula. Here it is: Z = 1.2X(1) + 1.4X(2) + 3.3X(3) + 0.6X(4) + 1.0X(5) Given the limitations of SI's word-processor, I have denoted the X(1) to mean "X sub 1" and so on. The following identify the various variables in the equation: X(1) = 'Working Capital' to 'Total Assets' X(2) = 'Cumulative Retained Earnings' to 'Total Assets' X(3) = 'Earnings before interest & taxes' to Total Assets X(4) = 'Market Value of Equity' to 'Book Value of Total Liabilities' X(5) = 'Sales' to 'Total Assets' Studies have found that whenever the 'Z' value fell below 1.81 (including the negative amounts), companies always went bankrupt, whereas companies with 'Z' values above 2.99 represented healthy firms. Anything in between fell into a gray zone. Now the improved version, which did not have a disclosed formula, made modifications by including additional factors in their studies: 1. Return on Assets 2. Stability of Earnings 3. Interest Coverage Ratio 4. Retained earnings to Total Assets 5. Current Ratio 6. Common Equity to Total Capital 7. Size of Total Assets What is incredible is that with the results, the model was able to predict up to a 96% rate of accuracy the bankruptcies that occurred within a year, and up to 70% rate five years before. Now I wonder how Sunbeam will respond to this test... RT