Schwab Equity

Why analysts can miss the mark by focusing on earnings-per-share growth SAN FRANCISCO, Oct. 13 /PRNewswire-FirstCall/ -- As earnings reportingseason returns, the research team for Schwab Equity Ratings(R), Charles Schwab& Co.'s proven approach to stock selection, is highlighting "surpriseanticipation" as a key factor investors should consider when evaluatingpotential investment strategies. According to Greg Forsythe, senior vice president and director of SchwabEquity Ratings, focusing on a stock's likelihood to post future earningssurprises 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 equityresearch on factors like high earnings-per-share growth," said Forsythe. "Theproblem is that stocks with high historical EPS growth rates and the highestforecasts of future EPS growth are the most likely to report negative earningssurprises." How to find stocks that may surprise the street The goods news is that "surprise anticipation" is not an oxymoron. Tofind stocks most likely to report positive surprises, the secret is to lookfor signs of low, but rising expectations. As a first step, Forsythe recommends investors consider the followingfactors 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 ofimproving expectations, including recent positive analyst forecast revisions,recent stock price outperformance, growing free cash flow, and improvingearnings quality. Comerica (CMA), Norfolk Southern (NSC), Raytheon (RTN), andVF Corp (VFC) are examples of companies that, in Forsythe's view, have a goodchance of posting a positive surprise in coming days. For Important Disclosures and Regulation Analyst Certification, see end ofNews Release. On the opposite end of the spectrum, stocks with high but fallingexpectations should be avoided. Forsythe says the following signs of highexpectations 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 tothose with negative analyst forecast revisions, recent price underperformance,falling or negative free cash flow, and declining earnings quality as havingthe greatest chance for a negative surprise. He cites Arch Coal (ACI),Expeditors International (EXPD), JetBlue Airways (JBLU), and RegalEntertainment (RGC) as examples. "By determining a company's likelihood to surprise and evaluating otherpredictive factors, Schwab Equity Ratings have been successful at identifyingstocks 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 brokeragefirm. Stocks are assigned ratings of A, B, C, D, or F, with A's and B'sconsidered "buys," D's and F's "sells," and C's holds. Ratings are generallyupdated each week to reflect new financial data and other information. Onaverage, for all complete 52-week periods since Schwab Equity Ratings'inception (May 6, 2002) through September 19, 2005, A-rated stocks as a grouphave outperformed the average of all stocks as a group rated by Schwab EquityRatings by 6.2 percentage points and outperformed the Dow Jones Wilshire 5000Index by 18.1 percentage points. For more information on Schwab EquityRatings, 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 operatingsubsidiaries, provides securities brokerage and financial services toindividual investors and the independent investment advisors who work withthem. With over 7 million individual investor accounts and more than $1trillion in client assets, The Charles Schwab Corporation is one of thenation's largest financial services firms. Its subsidiary Charles Schwab &Co., Inc. (member SIPC) provides a complete range of investment services andproducts, including an extensive selection of mutual funds; financial planningand investment advice; retirement plans; referrals to independent fee-basedinvestment advisors; and custodial, operational and trading support forindependent fee-based investment advisors. Its subsidiary Charles Schwab Bank,N.A. (member FDIC) provides banking and mortgage services and products. TheCorporation's other operating subsidiaries include U.S. Trust Corporation(member FDIC) and CyberTrader(R), Inc. (member SIPC) .These companies' Websites can be reached at http://www.schwab.com, http://www.schwabbank.com, http://www.ustrust.comand http://www.cybertrader.com. (0005-4348) For important research disclosures on the companies listed in thesematerials, 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'spersonal views about the applicable subject securities and issuers and no partof my compensation was, is or will be related to the specific recommendationsor views contained in these materials. Limitations of Model Performance For all model performance results, there are inherent limitations whichinvestors should understand. Unlike an actual performance record, simulatedresults do not represent actual investment performance or trading. Since thetrades have not actually been executed, the results may not reflect the impactof certain market factors, including limited trading liquidity. Norepresentation is being made that any investor will or is likely to achieveresults similar to those shown. The results presented reflect past performanceand should not and cannot be viewed as an indicator of future performance. Theresults shown are not an indicator of the returns a Schwab client would haverealized or will realize in relying on Schwab Equity Ratings or any stock listor model mentioned. The Schwab Equity Ratings and stock lists or models are not personalrecommendations for any particular investor and do not take into account thefinancial, investment, or other objectives, and may not be suitable for anyparticular investor. Before buying, investors should consider whether theinvestment is suitable for themselves and their portfolio. Additionally,investors should consider any recent market or company news. Stocks can bevolatile and entail risk, and individual stocks may not be suitable for aninvestor. 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 arealso calculated on a weekly basis but may be presented less frequently. Fifty-two week time periods were selected for tracking performance because SchwabEquity Ratings are meant to identify those stocks that will most likelyoutperform or underperform the broader market over the next 12 months. Overtime, 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 Frating cohort by dividing the ending price plus dividends paid during theperiod, if any, by the starting price for a particular holding period, minusone. Returns are calculated based on the market closing prices on the HoldingPeriod Start Date and the market closing prices on the Holding Period EndDate. All stocks within a Schwab Equity Rating cohort are equal-weighted at thebeginning of the performance calculation period, meaning each stock has thesame value relative to any other stock. Performance is calculated assumingstocks are held for the entire holding period. After individual stock returnsare calculated, Schwab averages the total returns for all of the stocks withina cohort during that time period to find the average return. Transaction costs such as brokerage commissions, fees or other expenseshave not been deducted from the total return calculations. Results would havebeen lower if such costs were deducted. The amount of the actual commissionsand other fees you may pay will vary depending on, among other things, thenumber of shares you buy and the way you execute the trade (such as viaschwab.com or through a Schwab Investment Consultant).

Blogged by Linesave