What to Do When the Schwab Equity Rating Disappears

by Jeffrey P. Ryan, CFA, Senior Equity Researcher, Schwab Equity Ratings®, Schwab Center for Financial Research
March 3, 2009

Part 2 of 2 in a series on understanding exceptions to Schwab Equity Ratings®.

In "Understanding Exceptions to Schwab Equity Ratings," we looked at reasons why a stock's Schwab Equity Rating might be replaced by an NR (not rated) or modified by a "Pertinent News" asterisk. We also listed some of the types of news events that might lead to an NR or asterisk, depending on the significance and potential materiality of the event. But what steps should you take if your stock's rating is modified by an asterisk, or is replaced by an NR?

Use our four-step research process to help you decide your next move.

Step 1: Check the scorecard
The first step is to click on the letter grade of your stock's Schwab Equity Rating, or the NR that appears where the Rating would normally be displayed. This generates a quick look at Schwab’s rating, which contains the date the asterisk or NR was assigned and a brief explanation of the underlying event. Pay particular attention to the date and explanatory text (the circled information in the second image below), as these will guide your next steps. (You may also want to print the scorecard and keep it handy as you continue your research).

Viewing Schwab's equity scorecard

Understanding Schwab's equity scorecard

Step 2: Check the news
After you enter a ticker symbol, the "Summary" tab of the stock's page on Schwab.com will generally display a news headline and date at the top of the page. Don't stop there—the "News" tab provides access to news headlines from multiple sources, company press releases and company filings with the Securities & Exchange Commission ("EDGAR" filings). Look for stories specific to the stock you're researching with dates around the date shown in the scorecard.

Schwab.com "Summary" tab

Schwab.com "News" tab

When researching an asterisk or NR rating, make sure to pay close attention to the following data, as it may help in understanding the implications of the event:

The nature of the event. How does it relate to the types of events described in our earlier article? For example, researching an asterisk assigned to American Express (AXP) on November 11, 2008, disclosed this reason: "A decision by American Express management to become a commercial bank holding company, subjecting the company to additional regulatory oversight but allowing access to various emergency funding programs if necessary."
The event's scope. Is it specific to the company or part of a larger picture? (Industry-wide, sector-wide, etc.) The story stated that AXP was not alone in seeking to become a bank holding company—Morgan Stanley (MS) and Goldman Sachs (GS) were also seeking bank holding company status, suggesting that the issues facing these firms were industry-wide at the least.
Comments by securities analysts, regulators, investors or corporate officials. Any of these sources may provide clues about the implications of the event. Keep your eyes open for negative terms—a June 2008 article in the Journal of Finance¹ suggested that negative words in a news story (for example, "disappointing," "unexpected," "abused," "sternly disciplined" or " violated"), particularly about a company's earnings, were a possible indicator of poor future returns.

Step 3: Check the market's reaction
When researching a stock on Schwab.com, use the stock's "Charts" tab to view the behavior of the stock's price around the date when the event occurred. An important point to keep in mind is the distinction between a stock's price performance and its relative performance (that is, in comparison to the market in general and to its economic sector).

Schwab.com "Charts" tab

The "Comparisons" feature allows you to view the stock's price relative to the market's performance (using the S&P 500 or other indexes) and to sector and industry performance.

The image above, for example, shows the performance of the insurance industry and multi-line insurance subindustry.² If the market was down by 4% on the day of the event and your stock was down by roughly the same amount, the stock's relative price change may be insignificant. A larger price change, relative to the market, sector or industry, indicates that the event had a more serious effect.

You should also pay attention to the market's reaction after the event—a significant post-event price recovery in relative terms may indicate an initial overreaction and later reassessment.

Step 4: Check third-party opinions and research reports
Schwab provides research reports and analysis from several independent sources, including Standard & Poor's, Credit Suisse³, Ned Davis Research, Argus Research and others. Links to these reports appear on the "Summary," "Ratings" and "Reports" tabs of any stock's page on Schwab.com. Frequently, analysts at these firms can produce a research report within a day or two of an event.

What should you look for in a third-party research report? Focus on the same things you considered in reviewing the news—an informed, written assessment of the nature of the event, its scope and its implications for investors. You can also see recent changes in brokerage firm analysts' earnings estimates and recommendations by visiting the "Reports" tab on Schwab.com and clicking the link to the Schwab Earnings Report.

Time to take stock: Consider selling
After completing the research steps described above, take a moment to reflect on what you've learned. If the news stories, the market's reaction, and third-party research sources all suggest that the event is significant and negative, you might want to consider selling the stock. For additional guidance on the sell decision and the tax aspects of selling, please read Greg Forsythe's related articles, "Considerations for Deciding When to Sell a Stock" and "Tax Considerations for Selling a Stock."

1. Paul C. Tetlock, Maytal Saar-Tsechansky and Sofus Macskassy, "More Than Words: Quantifying Language to Measure Firms' Fundamentals." Journal of Finance, June 2008.
2. Note that the performance of sectors and industries are not available for 1-, 3-, 5-, and 10-day charts because performance data for these indexes are only available on a "daily" frequency.
3. Not available to all clients.

Important Disclosures

Schwab Equity Ratings are assigned to approximately 3,000 of the largest (by market capitalization) U.S.-headquartered stocks using a scale of A, B, C, D and F. Schwab's outlook is that A-rated stocks, on average, will strongly outperform, and F-rated stocks, on average, will strongly underperform the equities market over the next 12 months. Schwab Equity Ratings are based upon a disciplined, systematic approach that evaluates each stock on the basis of a wide variety of investment criteria from four broad categories: Fundamentals, Valuation, Momentum and Risk. From time to time, Schwab may update the Schwab Equity Ratings methodology.

Schwab Equity Ratings are not personal recommendations for any particular investor. Before buying, investors should consider whether the investment is suitable for themselves and their portfolio. Schwab Equity Ratings are generally updated weekly. Stocks can be volatile and entail risks. Schwab Equity Ratings should only constitute one component in your own research to evaluate stocks and investment opportunities.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

(0309-7400)

Return to Top

Market Insight Alert Email

New Schwab commentary every two weeks:

Monday: Liz Ann Sonders
Thursday: Schwab Sector Views
Friday: Schwab Market Perspective

Clients can sign up now