About “The EPS Syndrome” and how it was discovered
During 2001 Enron’s shares fell from a 52-week high of $84 to pennies on the dollar when it filed for bankruptcy in December 2001. Since Wall Street’s analysts had been extremely bullish on Enron to the bitter end Michael Markowski decided to conduct a post mortem on Enron’s current and historical financial statement data. See “Wall Street analysts loved Enron to the end – Nov. 29, 2001”.
Mr. Markowski’s research enabled him to discover an anomaly in each of Enron’s first and second quarter calendar year 2001 financial statements. To determine the significance of the discovery of this anomaly and its application to the financial statements of other public companies, he conducted a five year back test for all public companies that had filed for bankruptcy over the previous five years. He discovered that more than 100 had been afflicted by the same anomaly including Sunbeam Corporation, a former household name which had died tragically in 1998.
The discovery that the common denominators were shared by more than 100 companies including Sunbeam and Enron, provided Mr. Markowski the diverse data that he needed to develop an algorithm to power an automated warning system. Based on the discovery of the anomalies and his being successful to develop an algorithm he founded StockDiagnostics.com, Inc., which specialized in providing cash flow analytics to its subscribers.
The “The EPS Syndrome” name was chosen for the warning system which is powered by the algorithm since the first criteria for the diagnosis are positive Earnings Per Share (EPS) for the quarter in which it was diagnosed. The presence of “The EPS Syndrome” reveals the true condition of a company’s earnings per share (EPS).
From 2002, through 2013, there were more than 100 companies which were diagnosed by StockDiagnostic.com as having the EPS Syndrome. Some of the household names included The Fleming Companies, which had been the US’ largest food distributor and had 18,000 employees when it went bankrupt in 2003. Lehman Brothers, Merrill Lynch, Bear Stearns, Goldman Sachs and Morgan Stanley were all diagnosed as having the syndrome. Mr. Markowski in his September 2007 Equities Magazine article entitled “Have Wall Street’s Brokers been Pigging Out?” advised all of his readers to exit the five brokers. See video below entitled “EPS Syndrome; Lehman and Merrill Lynch”.
Stock Diagnostics’ proprietary formulas that screen for and identify “The EPS Syndrome” are based on a combination of different financial statement elements and ratios. “The EPS Syndrome” is diagnosed when the difference between a public company’s Operating-cashflow Per Share (OPS) and it’s per share “Earnings” (EPS) reaches or exceeds a mathematical threshold or tolerance level. The primary catalyst for “The EPS Syndrome” diagnosis is negative Cashflow from Operations. Its detection triggers an extensive search for “The EPS Syndrome.” For a public company to be diagnosed as having “The EPS Syndrome,” it must exhibit certain financial statement criteria. “The EPS Syndrome” can only be diagnosed when all of the historic criteria and most recent (on diagnosis date) financial statement conditions have been met. The current and historic diagnoses of the “The EPS Syndrome” is based upon a public company’s quarterly financial reports.
The diagnosis of “The EPS Syndrome” means much more than a company reporting negative OPS and positive EPS. Over 2000 companies report at least one quarter per fiscal year of negative cash flow during each of their fiscal years and do not meet the criteria required for diagnosis of “The EPS Syndrome.”
“The EPS Syndrome” cannot be diagnosed or monitored by the human eye. The diagnosis of “The EPS Syndrome” is completely computer driven. It requires complex computer and proprietary database technology to continually monitor comprehensive data on public companies. Stock Diagnostics and its team of securities analysts and scientists devoted over six years and millions of dollars in developing numerous patent pending algorithms, formulas and processes to monitor all public companies on a real time basis.
The shares of a company being diagnosed with the “The EPS Syndrome” are at high risk. It’s because, by definition, the syndrome only appears in companies that appear to be doing very well. A company’s reporting of record earnings per share (EPS) along with the many Wall Street “Buy” recommendations propel its shares to all-time highs. For example, one of the many companies diagnosed with “The EPS Syndrome” by Stock Diagnostics is Suprema Specialties Inc. Suprema, for its fiscal year ending June 2001, reported its fifth consecutive year of record earnings (EPS) at $1.42 per share and its seventh consecutive year of record revenue at $420 million. Despite this apparent stellar performance Suprema filed for bankruptcy in February of 2002, and its stock recently plummeted from $13 to $.03 per share.
Companies diagnosed with the “The EPS Syndrome” should be continually monitored. Operating-cashflow per share (“OPS”) is a company’s financial lifeblood. A sudden change in OPS can drain this lifeblood, causing an increase in debt, share dilution, share price erosion and in the more extreme cases, bankruptcy. The OPS for public companies should be monitored regularly on the Stock Diagnostics system for “The EPS Syndrome”.
A company previously diagnosed with “The EPS Syndrome” is considered to be in remission only after it has passed annual check-ups for three consecutive fiscal years. To meet the qualifications for those three fiscal years it must have reported positive OPS for each of those fiscal years and must not have been re-diagnosed with “The EPS Syndrome” at any time during the 3 consecutive years. Like all other companies, those in remission need continual monitoring for “The EPS Syndrome”.