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Hudson Labs' high vs. low risk companies see 20+ point differential in returns

TLDR: Hudson Labs' highest risk companies had average returns of -22% while the lowest risk companies had returns of -1%. Results were measured over the 12 month period from June 7, 2021 to June 7, 2022.

Man, our models are smart.


This year has been a down year in the stock market. The Nasdaq Composite is down more than 12%.


Most of us are hurting but if you’ve been subscribing to Hudson Labs' Risk Scores, you’ve avoided (or taken advantage of) the worst of it. Our models “read” 100s of pages of securities filings each quarter, and predict the risk of fraud and earnings quality issues for over 7,000 listed companies based on qualitative/narrative information.


Let’s look at average returns using a strategy informed by Hudson Labs Risk Scores. Note that this analysis covers the last 12 months. For a more detailed historical analysis, refer to our whitepaper. We retrieved the annual stock returns for companies with market caps greater than $300 million and that have Hudson Labs scoring, a universe of ~3,000 companies. We compared the average market returns for the top 10% highest risk companies (by Hudson Labs Risk Score) to the bottom 10%. We assume $1 invested in each stock June 7, 2021 and sold on June 7, 2022.


The highest risk companies by Hudson Labs Risk Score had average returns of -22% while the lowest risk companies had returns of -1%. The bottom 5% of lowest risk companies boasted positive average returns of just over half a percentage point. In fact, the bottom 50% of lowest risk companies reported average returns of -2% and the bottom 60% of lowest risk companies reported -3% returns, substantially better than the catastrophic returns of the top ten percent.

These results demonstrate that avoiding the riskiest companies is an impressively effective strategy.


Top 10% - Highest Risk Companies


If you invested in companies with Hudson Labs Risk Scores in the top 10% (i.e., companies with the highest risk), your average market returns would be at -22% (median of -25%) from June 7, 2021 to June 7, 2022. Ouch.


Major losers included Peloton Interactive, Lordstown Motors, Bark, Stitch Fix, Beyond Meat and Canopy Growth, all of which had negative returns over more than EIGHTY percent over the period. These companies were all rated high risk by Hudson Labs as of June, 2021.


Another big losers this year was FuboTV ($FUBO). This company’s stock price dropped almost 90% over the past year! FuboTV has featured in previous Hudson Labs blog posts: Hudson Labs vs. Activist Shorts (April 2021) and That’s not my name - fraud risk and corporate name changes (November 2021).


Here are some highlights of what you would have found on the Hudson Labs portal for FuboTV back in May 2021. The company’s top red flags included accounting restatements, ineffective internal controls, and legal issues:


Top red flags at FuboTV


For a full list of the top 10% riskiest companies as at June, 2021 and related returns, contact us here.

Sector Distributions:


More than ten percent of companies in the top 10% riskiest were SPACs, while no SPACs appeared in the bottom 10% lowest risk companies by Risk Score. (No surprises there.) Technology and healthcare companies featured heavily in both the highest risk and lowest risk groups.


Bottom 10% - Lowest Risk Companies


Low risk companies included Magnolia Oil & Gas, Haliburton, Tower Semiconductor and Novo Nordisk who all had returns of over 45 percent during the period. (We’re clearly not an ESG service.) For a complete list, contact us here.


During a time when equities have been dropping precipitously in value, it clearly pays to read securities filings OR better yet, let us read them for you.


Hudson Labs allows you to scale and automate your forensic equity research. We provide real-time scoring and red flag extraction for over 7,000 listed companies.


If you had started using Hudson Labs this time last year, you wouldn’t be so sad right now.

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