Z Score Reads Smoke Signals
Sun Herald
Sunday April 8, 2001
THE fiasco over Harris Scarfe brings back memories of Brashs. I remember the Z score for Brashs deteriorating each year while brokers were lauding it as a growth stock.
The Z score measures the financial health of the company. Deterioration in the Z score each year indicates over-trading and liquidity strain.
Merv Lincoln pioneered its use in Australia (he called it something else) and it picked up the Brashs problem.
In late 1996 I looked at Harris Scarfe, when it was about $1.25, but wasn't convinced about the turnaround story on the assets they had bought. But the market did buy the story though, and the shares peaked at $1.75 in late 1998. As with the techs, there comes a time of reckoning when the runs have to be put on the board. The share price has been sliding ever since.
A similar dilemma exists with Pasminco. A somewhat harmless missing of a $3 million termination fee on its Ernest Henry dealings led to rumours it is in a cash crisis. The company has been swift to deny the rumours. Below 50, it is firmly in my recovery territory.
Apart from its lead pollution litigation, the most embarrassing thing for Pasminco is that it appears to have protected itself against a rising Australian dollar by entering into currency contracts which created an open-ended exposure to a falling dollar below US60. Meanwhile, zinc prices in US dollars have fallen too.
Assuming the company survives, it will run up if we get a combination of a falling US dollar (rising Australian dollar), falling interest rates and rising zinc prices.
At this stage, you cannot lose more than 50 in a stock quite capable of rebounding 300 per cent over the next bull market. A takeover is likely, too. I like the odds.
And it is for a good cause. Apart from rust protection, zinc is used for sun protection and pepping up the sex drive!
It's been another frenetic week for me with evening seminars around Sydney and at Newcastle as well as recruiting four people.
I always find the seminars fascinating. For the first time in six seminars, we had two smokers in the audience. That's two people out of about 260 people who have attended.
The reason I ask is because we still do not have a smoker among our client base as far as we know. And since the people who attend our seminars do not smoke, the odds favour it staying that way.
An interesting throwaway statistic I usually mention at seminars is that people who own shares live on average at least two years longer than people who do not. In the past few seminars, everybody in the room already owned shares. Curiously, the one exception was one of the women who also smoked!
© 2001 Sun Herald