Mar

28

Here is some Friday fun. Stimulated by the S-Man's comments about electrical utilities combined with the government report on corporate profit margins being near/at record highs while company hiring is sluggish….

Hypothesis: The S-Man has hypothesized that companies with fewer employees make better investments. This is consistent with the view that capital is cheaper than labor. And that government regulations have made hiring more expensive. Rocky accepts that companies with only one employee have no sex discrimination lawsuits. And companies with less than 50 employees have no ObamaCare issues. But do companies that produce more revenues per employee perform better per se (as measured by the stock price)? Rocky did a 5 minute back-of-the-envelope study on the 150 largest (by market cap) US companies.

He asked: what is the correlation between the 5 year total return of the stock price and the revenues/employee?

The answer: -.21 . That is, ceteris paribus, higher 5 year total returns are INVERSELY CORRELATED with higher revenues/employee. Or put another way, lower revenues/employee are correlated with better 5 year stock performance.

And it is suggestive that MORE employees producing FEWER revenues produce BETTER stock prices. Very counterintuitive.

This is a very sloppy analysis. But it's food for thought. Now it's pizza time. And that's even better food for thought.

(Rocky is sure that others have done this analysis in a more sophisticated way and he welcomes critical comments.)

Larry Williams writes: 

I tested revenue per employee a few years back so this is reaching into old rusty memory banks but the recollection is it was just "ok" as a value measure and did not fit all companies. Service industries have to have employees, some high tech and mortgage companies can get by with less.

Memory is clear that this was not anything special to use to find value in stocks.


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