Schwab Equity Ratings Research Finds Surprise Anticipation Strategy Can Increase Chances of Investment Success
October 13 2005 - 2:37PM
PR Newswire (US)
Why analysts can miss the mark by focusing on earnings-per-share
growth SAN FRANCISCO, Oct. 13 /PRNewswire-FirstCall/ -- As earnings
reporting season returns, the research team for Schwab Equity
Ratings(R), Charles Schwab & Co.'s proven approach to stock
selection, is highlighting "surprise anticipation" as a key factor
investors should consider when evaluating potential investment
strategies. According to Greg Forsythe, senior vice president and
director of Schwab Equity Ratings, focusing on a stock's likelihood
to post future earnings surprises can provide an edge when
evaluating which stocks to buy or sell. "Individual investors and
even professional equity analysts often get sub- par performance
when they mistakenly place too much emphasis in their equity
research on factors like high earnings-per-share growth," said
Forsythe. "The problem is that stocks with high historical EPS
growth rates and the highest forecasts of future EPS growth are the
most likely to report negative earnings surprises." How to find
stocks that may surprise the street The goods news is that
"surprise anticipation" is not an oxymoron. To find stocks most
likely to report positive surprises, the secret is to look for
signs of low, but rising expectations. As a first step, Forsythe
recommends investors consider the following factors to identify
stocks with low expectations: -- Low price multiples, as measured
by metrics such as price-to-earnings, price-to-book and
price-to-sales -- Management returning cash to investors in the
form of dividends, share buybacks or debt repayment -- Insiders or
short sellers buying shares -- Visible company problems or issues
The next step is to examine the low expectation stocks for signs of
improving expectations, including recent positive analyst forecast
revisions, recent stock price outperformance, growing free cash
flow, and improving earnings quality. Comerica (CMA), Norfolk
Southern (NSC), Raytheon (RTN), and VF Corp (VFC) are examples of
companies that, in Forsythe's view, have a good chance of posting a
positive surprise in coming days. For Important Disclosures and
Regulation Analyst Certification, see end of News Release. On the
opposite end of the spectrum, stocks with high but falling
expectations should be avoided. Forsythe says the following signs
of high expectations may warn of a negative earnings surprise: --
High one-year and five-year EPS growth forecasts -- High price
multiples, especially when EPS is negative -- Management expanding
capital base by issuing shares or debt, and heavily reinvesting
through acquisitions, research and development and capital
expenditures -- Consensus analyst rating of "buy," especially when
supported by an exciting story -- Company has great reputation
Among high expectation stocks meeting these criteria, Forsythe
points to those with negative analyst forecast revisions, recent
price underperformance, falling or negative free cash flow, and
declining earnings quality as having the greatest chance for a
negative surprise. He cites Arch Coal (ACI), Expeditors
International (EXPD), JetBlue Airways (JBLU), and Regal
Entertainment (RGC) as examples. "By determining a company's
likelihood to surprise and evaluating other predictive factors,
Schwab Equity Ratings have been successful at identifying stocks
with the highest potential for growth or decline," said Forsythe.
About Schwab Equity Ratings Schwab Equity Ratings are objective
ratings on approximately 3,000 U.S. headquartered stocks, more
stocks than are rated by any other major brokerage firm. Stocks are
assigned ratings of A, B, C, D, or F, with A's and B's considered
"buys," D's and F's "sells," and C's holds. Ratings are generally
updated each week to reflect new financial data and other
information. On average, for all complete 52-week periods since
Schwab Equity Ratings' inception (May 6, 2002) through September
19, 2005, A-rated stocks as a group have outperformed the average
of all stocks as a group rated by Schwab Equity Ratings by 6.2
percentage points and outperformed the Dow Jones Wilshire 5000
Index by 18.1 percentage points. For more information on Schwab
Equity Ratings, including performance details, how performance was
calculated, comparison of performance to benchmarks and limitations
of model performance, visit http://www.schwab.com/serperformance.
About Charles Schwab The Charles Schwab Corporation (NYSE / Nasdaq:
SCH), through its operating subsidiaries, provides securities
brokerage and financial services to individual investors and the
independent investment advisors who work with them. With over 7
million individual investor accounts and more than $1 trillion in
client assets, The Charles Schwab Corporation is one of the
nation's largest financial services firms. Its subsidiary Charles
Schwab & Co., Inc. (member SIPC) provides a complete range of
investment services and products, including an extensive selection
of mutual funds; financial planning and investment advice;
retirement plans; referrals to independent fee-based investment
advisors; and custodial, operational and trading support for
independent fee-based investment advisors. Its subsidiary Charles
Schwab Bank, N.A. (member FDIC) provides banking and mortgage
services and products. The Corporation's other operating
subsidiaries include U.S. Trust Corporation (member FDIC) and
CyberTrader(R), Inc. (member SIPC) .These companies' Web sites can
be reached at http://www.schwab.com/, http://www.schwabbank.com/,
http://www.ustrust.com/ and http://www.cybertrader.com/.
(0005-4348) For important research disclosures on the companies
listed in these materials, please write to Charles Schwab & Co,
Inc. 101 Montgomery Street, Mail code 120 KNY-27-227, San Francisco
CA 94104. Analyst Certification The views expressed in these
materials accurately reflect Greg Forsythe's personal views about
the applicable subject securities and issuers and no part of my
compensation was, is or will be related to the specific
recommendations or views contained in these materials. Limitations
of Model Performance For all model performance results, there are
inherent limitations which investors should understand. Unlike an
actual performance record, simulated results do not represent
actual investment performance or trading. Since the trades have not
actually been executed, the results may not reflect the impact of
certain market factors, including limited trading liquidity. No
representation is being made that any investor will or is likely to
achieve results similar to those shown. The results presented
reflect past performance and should not and cannot be viewed as an
indicator of future performance. The results shown are not an
indicator of the returns a Schwab client would have realized or
will realize in relying on Schwab Equity Ratings or any stock list
or model mentioned. The Schwab Equity Ratings and stock lists or
models are not personal recommendations for any particular investor
and do not take into account the financial, investment, or other
objectives, and may not be suitable for any particular investor.
Before buying, investors should consider whether the investment is
suitable for themselves and their portfolio. Additionally,
investors should consider any recent market or company news. Stocks
can be volatile and entail risk, and individual stocks may not be
suitable for an investor. Indices are unmanaged, do not incur
management fees and expenses, and cannot be invested in directly.
Since ratings are generally updated weekly, new performance numbers
are also calculated on a weekly basis but may be presented less
frequently. Fifty- two week time periods were selected for tracking
performance because Schwab Equity Ratings are meant to identify
those stocks that will most likely outperform or underperform the
broader market over the next 12 months. Over time, the model upon
which ratings are based may be altered. How Performance Is
Calculated Schwab calculates the total return for each stock in
each A, B, C, D and F rating cohort by dividing the ending price
plus dividends paid during the period, if any, by the starting
price for a particular holding period, minus one. Returns are
calculated based on the market closing prices on the Holding Period
Start Date and the market closing prices on the Holding Period End
Date. All stocks within a Schwab Equity Rating cohort are
equal-weighted at the beginning of the performance calculation
period, meaning each stock has the same value relative to any other
stock. Performance is calculated assuming stocks are held for the
entire holding period. After individual stock returns are
calculated, Schwab averages the total returns for all of the stocks
within a cohort during that time period to find the average return.
Transaction costs such as brokerage commissions, fees or other
expenses have not been deducted from the total return calculations.
Results would have been lower if such costs were deducted. The
amount of the actual commissions and other fees you may pay will
vary depending on, among other things, the number of shares you buy
and the way you execute the trade (such as via schwab.com or
through a Schwab Investment Consultant). DATASOURCE: Charles Schwab
CONTACT: Sondra Harris of Charles Schwab, +1-415-636-3292 or Web
site: http://www.schwab.com/
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