It has been 76 days since Lawrence Carrel’s article about Equity Risk Sciences and the high risk of the overall market appeared in Forbes. On May 27, 2020 the S&P 500 closed at 3,036.13. Today, August 11, 2020, it closed at 3,333.69, or about 10% higher than it was when the Forbes article was released. Does the fact that the market rose 10% mean the dangers ERS warned of have failed to come to pass? It’s too soon to tell. That being said, it may be worthwhile to point out that all of the reasons we urged caution in May are still applicable in August.
We commented on two individual stocks towards the end of the article. One of them, Bristol Myers (BMY), we called a “high-risk” company which had borrowed too much money; the other, BorgWarner (BWA), we called a “fundamentally strong company with an extremely low risk profile” due to its much lower liabilities. It may interest readers to learn that in the 76 days since the Forbes article ran, BorgWarner has significantly outperformed Bristol Myers:
As the above chart shows, BorgWarner has produced a 28% gain, while Bristol Myers has lagged behind the S&P 500 with only 5% growth over the same period.
Astute readers will note that one stock does not a whole portfolio make. It is true that one example can only be considered an “anecdote” in terms of proving the efficacy of ERS’s risk-rating methods. However, examples like these can still be valuable: after all, any system which can differentiate between a stock which almost triples the S&P 500 and another stock which fails to make even half of the S&P’s gains is worth a closer look.