5 Companies That Are Distressing Investors

BOSTON ( TheStreet) -- Sears, Jamba Juice and Domino's Pizza are among companies investors ought to avoid because they're too distressed, according to a measure known as the Altman-Z Score.

The Altman-Z Score was developed by Edward Altman to help identify companies that may fall into bankruptcy. The quantitative scoring system combines five financial ratios using a company's balance sheet to categorize companies into several bankruptcy-probability buckets.

The five metrics of the Altman Z Score include working capital/total assets, retained earnings/total assets, EBIT/total assets, market value of equity/book value of total liabilities and sales/assets.

A company with an Altman Z score of less than 1.81 is considered to be in a "distress zone" and, therefore, according to Altman, is at a higher risk for bankruptcy versus its competitors.

Altman also developed a metric called the Double Prime Z Score specifically for non-manufacturing firms, a slight variation on the aforementioned model. It identifies distress levels as companies with a score less than 1.1.

TheStreet Ratings analyzed the Altman Z Scores of all U.S.-traded stocks and searched for notable companies with scores below the distress level.

What follows are five companies that, according to Edward Altman's gauge, have a higher probability of bankruptcy. Note that we have used the second variation seeking non-manufacturing firms with a Double Prime Z Score less than 1.1.

Overstock ( OSTK)

TheStreet Ratings Recommendation: SELL

Altman Z Score: -8.74

Buy OSTK Ratings Report

Overstock, a struggling online retailer, has long been a target of short sellers. As of last check, nearly 22% of the company's float was held short. Those short sellers have likely identified the concerns that we see regarding the solvency of the company. Here's a snippet from our report:

"The company has grown sales and net income during the past quarter when compared with the same quarter a year ago. However, it was unable to keep up with the growth of the average competitor within its industry.

Overstock has weak liquidity. Currently, the quick ratio is 0.61, which shows a lack of ability to cover short-term cash needs. The company's liquidity has decreased from the same period last year.

During the same period, stockholders' equity ("net worth") has decreased by 24% from the same quarter last year. Overall, the key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the future."

Supervalu: ( SVU)

TheStreet Ratings Recommendation: SELL

Altman Z Score: -0.46

Buy SVU Ratings Report

Supervalu, facing stiff competition in an already cut-throat grocery industry, recently made sweeping changes, bringing in a new CEO, Wayne Sales, to head up the company. It remains to be seen whether Sales can turn around Supervalu which is losing market share to organic grocers (Whole Foods) along with the big-box retailers such as Target and Wal-Mart. Here's a snippet from our report:

"The debt-to-equity ratio is very high at 98.25 and currently higher than the industry average, implying that there is very poor management of debt levels within the company. Along with this, the company's quick ratio of 0.26 clearly demonstrates the inability to cover short-term cash needs.

Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation."

Sears Holdings: ( SHLD)

TheStreet Ratings Recommendation:: SELL

Altman Z Score: -0.55

Buy SHLD Ratings Report

Sears is in survival mode as management has closed stores in an attempt to cut costs and re-establish itself as a leading department store. The problem is that with the likes of competitors such as Target, Kohl's, Macy's and Wal-Mart, it's possible Sears could find itself as the odd man out. Here's a snippet from our report:

"Sears has very weak liquidity. Currently, the quick ratio is 0.15, which clearly shows a lack of ability to cover short-term cash needs. The company's liquidity has decreased from the same period last year.

At the same time, stockholders' equity ("net worth") has significantly decreased by 46% from the same quarter last year. The key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the near future."

Jamba Juice: ( JMBA)

TheStreet Ratings Recommendation: SELL

Altman Z Score: -16.3

Buy JMBA Ratings Report

Jamba Juice, which is in the middle of an attempt to try and turn its stores into a more healthy option for consumers, recently missed guidance for both its top and bottom line. With the stock trading at less than $3 per share, there are concerns that with competitors such as McDonald's and Starbucks moving into juices and healthier drinks, it could be too much for Jamba to overcome. Here's a snippet from our report:

"Jamba has weak liquidity. Currently, the quick ratio is 0.57, which shows a lack of ability to cover short-term cash needs. The company's liquidity has decreased from the same period last year.

During the same period, stockholders' equity ("net worth") has decreased by 14% from the same quarter last year. Overall, the key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the future."

Domino's Pizza: ( DPZ)

TheStreet Ratings Recommendation: HOLD

Altman Z Score: -6.66

Buy DPZ Ratings Report

Domino's, which has rallied by 24% over the past year, might be worth another look as the company's balance sheet is less than desirable. Here's a snippet from our ratings report:

"Domino's Pizza has weak liquidity. Currently, the quick ratio is 0.77 which shows a lack of ability to cover short-term cash needs. The company's liquidity has decreased from the same period last year.

During the same period, stockholders' equity ("net worth") has decreased by 17% from the same quarter last year. Overall, the key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the future."

There you have it. Tomorrow, we will provide another five stocks that look weak according to the Altman-Z Score.
Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser. Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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