ERS Helps You Reduce Investment Losses
Using Proprietary Predictive Analytics

ERS employs proprietary predictive analytic technology to measure the safety and risks of individual non-financial stocks. This technology also measures the risks of various indexes and sectors. ERS’s risk analysis derives its ratings from the 5-to-10-year changes on a company’s financial statements. We seek to identify the most fundamental reasons why stock prices rise and fall. While many systems identify momentum, fads and trends; ERS’s technology defines some of the critical “laws” of investing through thousands of back-tests over the past 30 years.

By Raymond M. Mullaney, CEO
January 21, 2022

The following common-sense examples of financial “laws” illustrate the point over sufficiently long periods of time:

  1. Companies with rapidly declining sales, rapidly rising debts, declining current assets and rising current liabilities fall greatly in price,
  2. Companies with rapidly rising sales, rapidly declining debts and current assets which consistently rise faster than their current liabilities rise substantially in price,
  3. Companies with stagnant sales, stagnant debt levels and stable net current assets experience limited price changes, and
  4. Companies with market caps that exceed the net present value of the returns investors can obtain or expect to obtain in alternative investments on a risk adjusted basis tend to fall. The opposite is also true.

If you believe that “in the long-run, capital markets allocate capital efficiently”, then the rules of efficiency must be logical, measurable and ascertainable. We study dozens of additional metrics that impact prices and thousands of ways to combine those metrics. If we can put men on the moon, we can reliably identify risk and safety metrics which more often than not predict price declines and/or price increases. If that were not true, investing would be nothing more than speculation. The question is: which combination of financial metrics most reliably assesses the risk and safety of a stock, over what time periods, in which industries, and in what kinds of markets?

ERS has made discoveries that are very valuable to institutional investors. However, although price changes are in large part influenced by changes in a company’s financial condition, they are also influenced by forces which cannot be objectively measured. The demand for stocks is also influenced by the number of salespeople employed by Wall Street and the amount of financial resources employed in marketing to sell stocks. Also, one cannot underestimate the impact of changes in investor attitudes, the liquid money supply, money market rates and general economic conditions on prices. These forces, only measurable after the fact, create considerable demand for stocks.

The emotions of fear and greed can be seen and measured in the price swings of stocks, but how investors will feel and what they will buy a year or two from now is unknowable. Therefore, no amount of data analysis can predict or estimate the degree to which these unknowable factors will influence future stock prices.

Economic changes and man’s emotions, perhaps especially when investing, are fundamentally unpredictable. Future stock prices will certainly be impacted by future corporate earnings, but even more so, future prices will be influenced by future P/E ratios and future investor sentiment. Objective measures of the value of stocks play only a small part in establishing stock prices.

Because ERS’s models do not assess the degree to which investors’ emotions influence prices, ERS does not attempt to predict future prices.

ERS’s greatest contribution to investment advisors lies in our ability to help advisors
objectively evaluate financial risks and allocate clients’ capital most safely and efficiently.

Share Buybacks and Financial Strategy

Over the past 30 years, Kohl’s has generated $415 billion in revenue and $18.2 billion in net income, approximately 4.5% of revenue. During this time, the company:

  • Paid $4 billion in dividends.
  • Directed $11 billion of its earnings toward share buybacks, reducing outstanding shares from 300 million to approximately 110 million.
  • Spent $2.06 billion on buybacks in 2021 and 2022 at an average price of $44.42 per share.

Had Kohl’s instead reinvested the $11 billion in S&P 500 index funds, the company could have:

  • Maintained approximately 330 million shares outstanding.
  • Accumulated $45 billion in cash and S&P index investments.
  • Increased its tangible equity to $48 billion, translating to $146 per share in tangible equity.

This report discusses how these alternative strategies might have strengthened Kohl’s financial condition and significantly enhanced shareholder value.

Lastly, the Microsoft chart illustrates the powerful impact that price to sales and price to earnings compression has on the future price of high growth stocks. It illustrates the fact that when a company’s valuation is high in spite of future revenue and earnings growth, the stock price still can fall very significantly.