The summer quarter is almost at an end, and we can look forward to two major events that will take place at that time. First, our children head back to school. Secondly, stock market quarterly reports trickle in, and these reports may affect the stock choices you and your children made over the summer. What are quarterly reports, and why are they so important? Let's take a look at these questions and more?

We can liken quarterly reports to report cards for companies, because these reports are based on how companies perform between quarters, and how analysts, brokers, and others rate these companies' performances. There are two differences between report cards and quarterly reports, however. Report cards are more frequent than annual reports, as report cards happen about every six weeks, whereas quarterly reports happen every four months. Additionally, we can replace the quarterly report analysts and brokers with teachers and parents who rate students by grades and expectations for the next report card.

Every quarter, brokers, and analysts evaluate a company's progress based on financial information and other materials that are not audited. Analysts then rate the company's equity and provide forecasts based on earnings per share, revenue, cash flow, long-term growth projections, stock recommendations, and CEO promises and explanations. For a more detailed definition of a quarterly report, try InvestorWords.com. This site is a great resource for detailed stock market definitions, so you might bookmark it for future reference.

Market analysts use a standard maintained by I/B/E/S or Institutional Brokers Estimates System, and this standard is designated by numeric values. If we compare the numeric values to report card grades, the final results look like this:

1. Strong Buy or Buy - Equals an "A." This grade creates expectations for the company to perform as well next quarter. A shining star.
   
   
2. Buy or Outperform - This equals a "B." Hopefully, the company will perform as well or better the next quarter.
   
   
3. Hold - This equals a "B-" or a possible "C." The company may go up, down, or maintain its performance.
   
   
4. Underperform - This equals a "C-" or possible "D." The company isn't performing to expectations. No TV until grades improve.
   
   
5. Sell - This equals an "F." The company, according to analysts, is beyond redemption for this quarter, and they're grounded. No TV, no phone, just bread and water for dinner.

These ratings could change each quarter dependent upon company performance and all the other factors mentioned above in the third paragraph. It's entirely possible that an "A" company could fall to the lowest depths (Sell), and an "F" company could astound everyone with an "A" during the following quarter (Strong Buy). If you want to see how these ratings can change, type your company's ticker symbol or company name into the "quotes" slot on the front page at BUYandHOLD. When your company profile comes up, use the drop-down menu to surf to "Analyst Ratings." Here you find your company's revenue, EPS (earnings per share), Analyst Recommendations and Revisions, and historical surprises, among other statistics.

These ratings are laid out according to the five categories I listed above, with the addition of a "no opinion" slot. These "grades" are listed as current, 1 month ago, 2 months ago, and a year ago. These numbers are not rated as "1-10," with 1 as the worst and 10 as the best, because they are rated by the number of analysts who offer their opinions on certain equities. In other words, if your company shows 8 "buy" for the current analysis and 7 "buy" for one month ago, then eight and seven analysts respectively rated this stock a "buy."

Notice the bottom line of this portion of the chart labeled, "Mean Rating." This is not, as my daughter Cora suggests, the meanest rating in the world. This isn't even a mean by statistical standards, where you add the numbers in the column and divide by the number of rows. It's more like a sliding scale rate, where the highest number is diluted by the lower numbers. It's best for us, as beginner investors, to simply note where the highest and lowest numbers land. If the highest number (say, "10") is in "buy," then you know that ten analysts believe this company will continue to outperform. However, you might also consider that every interested buyer out there will also know that ten analysts consider this stock worthy. Therefore, the stock price might be over-inflated due to demand.

The best way to determine if your equity is over-valued is to check historic numbers and the flow of volume and sales on your company's stock chart (go back to the pull-down menu and select "charts"). Also check past analyst ratings. If these ratings are consistently high in the "buy" category, if the company has a long history of high volume, and if the chart shows a steady rise, the company might be in a long growth phase. If you go to the drop-down menu and look at "news," you might find more information about why this company is in this position. You might discover that this company recently expanded and sales are predicted to do well for another 10 years. In this case, expect more great quarterly reports in the future.

While we may never find a stock with such promise, you can see how Cora and I use every page in BUYandHOLD's company profiles. We also use the company website to discover news that may not make the news page at BUYandHOLD. Additionally, if we're really serious about a particular equity, we order the company's annual report. While quarterly reports continue to give us a snapshot of how the company is faring throughout the year, the annual report presents the past year in review, along with everything we'd want to know about company operations. Remember that this report is a public relations piece meant to show the company in the best possible light. Another viewpoint comes from analysts, journalists, and others who - hopefully - report what they see, not what they want you to hear.

Next week we'll look at a few more ways to narrow down our stock selections.

Until Then,
Linda Goin