EPS may be your worst enemy and the bane of workers

EPS or earnings per share drive stock prices. Analysts routinely predict future EPS and that results in stock prices going up or down, at least in the short term.

Quarterly earnings should mean very little but they seem to mean a lot to investors and they drive companies to make very poor short-term decisions.

In an economic downturn we should expect earnings to drop, but to keep things moving along as best as possible we need people working, spending and saving.

Instead large companies conduct layoffs, cut pay, stop 401k matches simply to make things look better in the short term when nothing fundamental had changed with their business. In other words as the economy improves, earnings will again pick up or stabilize.

Of course, running a business is not all that simple, but adding to economic hardship and creating stress in individual’s lives simple to sustain stock prices in the next quarter or so is unnecessary. Declining earnings in the next three or six months should be irrelevant to the stock market, especially in recessions.

But, of course, many executive compensation plans reward based on EPS. That too needs reconsideration.

Boosting short-term earnings on the backs of workers is despicable. Instead of playing the EPS game, sound management should be able to cope with short-term economic stress … just as we expect American families to do.

Damn the analysts, full speed ahead.

3 comments

  1. Concur with the connection between stock price and executives compensation. On the other hand, the irrationality of the market’s responses to short terms, quarterly changes to a company’s earnings provides possibilities to invest in quality companies at a discount. Good with the bad.

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  2. I didn’t closely follow the stock market until the late 1990’s. My little knowledge of it and what was important was dividends and long term growth. But it seems to me that hedge funds and day traders, with the easy of online trading, change the focus from long term to daily gains. A lot of tech companies don’t pay dividends. Amazon still does not and it was in 2003 that Microsoft paid its first dividend and tech stocks might have help shift the focus. But to me the health of a company is determined by dividend payout which means sustained profits not daily to daily speculation. I wish the markets would go back to focusing on long term results again.

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