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FAQ Answers: SmartStock Report
 

These are answers to questions about the Sabrient SmartStock Report.

What is 'market capitalization'?  

Market capitalization is one way to judge the size of a company. It is a company's outstanding shares multiplied by its share price. For convenience, market capitalization (market cap) is grouped into three or four segments: large-cap, mid-cap and small-cap, with a fourth micro-cap segment recognized by some, including Sabrient.  

What are your market cap ranges? 

Sabrient recognizes these market cap ranges  

Market Capitalization	Market Cap Segment
More than $5 billion	Large-cap
Between $1.0 billion and $5 billion	Mid-cap
Between $150.0 million and $1 billion	Small-cap
Less than $150.0 million	Micro-cap

Do Sabrient’s market caps match the S&P ranges or Russell’s? 

Our market cap ranges track the S&P ranges, except for micro-caps. Neither S&P nor Russell recognize a separate micro-cap segment; rather, they label such stocks as small-caps. However, we have found that stocks of less than $150 million capitalization have their own recognizable behavior patterns in the market, and so we have placed them in a separate micro-cap segment.  

How can a stock be a large-cap one week and a small-cap the next week? 

Market capitalization changes as the share price increases or decreases or when the company issues new shares or repurchases shares that are currently outstanding. Therefore, if a company’s market capitalization is near the cusp of the next range, an increase in share price can push it up into a higher range while a decrease can drop it down into a lower range.  

How many stocks does Sabrient cover? 

Currently, we cover around 5,900 stocks. This number changes when new issues are added and old issues stop trading or are merged. 

Do you cover IPOs? 

Yes. As soon as the data is available on an IPO (which can be as soon as one day after it starts trading), we add it to our weekly run. We normally cover an IPO with 1 - 2 weeks after it starts trading. 

Do you cover foreign stocks? 

Only ADRs (American Depository Receipts) and ADSs (American Depository Shares). Investopedia defines ADR in this way:

A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas, and help to reduce administration and duty costs on each transaction that would otherwise be levied. The term ADR and ADS (American Depository Share) are often thought to be the same. Technically, an ADS is the actual share trading, while an ADR represents a bundle of ADSs.

Why is the date at the top of the SmartStock report different from the date at the bottom of the report? 

The date at the top of the report is the date of the ‘Stock Fundamentals’ (share price, market cap, p/e ratio, etc). The date at the bottom of the report is the date the report was prepared. We use the stock fundamentals as of the closing price on the day prior to the report date. 

Why is a large-cap stock sometimes compared with the S&P 400 MidCap Index (on page 2) and a mid-cap stock sometimes compared with the S&P 500 (a large-cap index)?  

If a stock is a member of the S&P 500, S&P 400 MidCap Index, or S&P 600 SmallCap Index, it will be compared to its member index on page 2 regardless of its market capitalization. 

Why are some stocks with very high scores rated a Hold? 

Sabrient's Buy, Hold and Sell ratings are rooted in our backtested extraction process. Only those stocks boasting the right mix of characteristics being rewarded by the current market are rated a Buy, which means that some stocks may rank among the very top of the markets for our value, growth or momentum measures and yet be rated a Hold.

If a stock is rated Hold, it may have recently changed to a Hold from Buy or Sell. If so, this may indicate one of the following:

(1) there has been a significant change in the stock’s fundamentals,

(2) the stock is already appropriately rewarded or punished by the market, or

(3) there simply has been some recent price consolidation that warrants attention.  

What do you mean by ‘extraction’ process? 

Sabrient's extraction process is the means by which we render top prospects from the 6000 or so issues trading on the ASE, NYSE or NASDAQ. This process of stock selection is founded in rigorous backtesting whereby we continually monitor the performance of core earnings, fundamental, balance sheet and technical criteria to see which are garnering a premium in today's markets. In turn, stocks which boast characteristics being rewarded in today's markets are sorted (or 'extracted') from the rest of the pack. 

How does a stock’s scores for the Best Performing Filters (page 3 of the StockSmart report) relate to the Sabrient Scores on pages 1 and 2? I saw a stock that was rated a Buy but had very low scores on the best performing filters. 

The Sabrient scores and the scores for the Best Performing Filters are not directly related. The Sabrient scores provide a snapshot of how a stock ranks against other stocks in the market as well as against its industry group and benchmark index: the higher the score, the better. 

The scores for the Best Performing Filters indicate how a stock compares to the rest of the market for the top filters that are currently being rewarded by the market. Other factors are involved in Sabrient’s ranking process, so the filter scores do not always correlate with the Sabrient rating. For individual stocks, the Buy, Hold, or Sell rating should be considered more important in the overall evaluation of a stock, regardless of specific filter scores. 

How do you determine a stock’s industry group? 

Our industry group classifications conform to S&P’s Global Industry Classification Standard (GICS®). 

What do you mean by 'backtesting'? 

We use a look-back period of 1-12 months, and calculate returns based on the performance of the top 25 stocks for any given filter/factor from the beginning of each month through the end of the most recent month. For example, if the most recent month is March 2006, we backtest the performance of each filter and each factor in each of the four market caps as follows:  

3/1/06 - 3/31/06
2/1/06 - 3/31/06
1/1/06 - 3/31/06
12/1/05 - 3/31/06
11/1/05 - 3/31/06
10/1/05 - 3/31/06
9/1/05 - 3/31/06
8/1/05 - 3/31/06
7/1/05 - 3/31/06
6/1/05 - 3/31/06
5/1/05 - 3/31/06
4/1/05 - 3/31/06 

Then we weight the returns for each of the 12 months, giving the most recent month the greatest weighting, the second most recent month the second greatest weighting, and so on. This allows the backtesting to accurately reflect what is working in the market now, as opposed to what was working in the market six or 12 months ago. 

Which benchmarks do you use for comparison in your backtesting? 

We use market-cap and style-specific benchmarks to insure that we’re comparing apples to apples. For example, for our small-cap value segment, we compare our backtested returns to the Russell 2000 Value Index, a small-cap value index; for our large-cap momentum segment, we use the S&P 500, a large-cap index, for comparison. 

What’s the difference between the Momentum Score and the Timeliness Score?  

The Sabrient Momentum Score considers buy-side volume and price action in conjunction with earnings strength while the Timeliness Score is a purely technical measure that also reflects group strength.