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Technology Stocks : Semi Equipment Analysis

SOXX 309.40

+1.0%

Dec 5 4:00 PM EST

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To: James Calladine who started this subject	10/9/2002 10:02:38 PM
From: Terry D	of 95530

The Inventory Connection "Two academics, Jacob K. Thomas and Huai Zhang, have uncovered a related pattern that may be helpful in individual stock selection across industry groups. In their paper, Inventory Changes and Future Returns, they found that the negative relationship between accruals and future abnormal returns is due mostly to inventory changes. They speculate that demand shifts are responsible for this and that the market has been unable to recognize impending profitability reversals. “We conjecture that demand shifts cause both the inventory changes and related profitability reversals we observe. Firms with prior increases (decreases) in profitability and demand are projected to continue that trend, but for some of these firms actual demand may fall short of (exceed) projected demand, and this imbalance between sales and production/purchases results in inventory increases (decreases). Demand shifts for these firms presage a reversal in profitability trends, but the stock market does not fully recognize this reversal until the following year because the implications of the demand shift are not revealed in contemporaneous reported profitability. We consider earnings management and the impact of varying production levels on fixed manufacturing overhead absorbed in COGS as potential reasons why the impending reversals are masked in reported profitability. We would note that the group with large inventory increases includes more retail and consumer-oriented stocks, while the large inventory decreases group includes more electronic technology (tech hardware) and industrial-oriented stocks.” Largest Inventory Decreases Scaled to Average Assets - 2 familiar names ALTERA CORP -10.06% XILINX INC -9.61% FYI - Largest Inventory Increases Scaled to Average Assets - AMERISOURCEBERGEN CORP 48.33% PULTE HOMES INC 43.66% NVIDIA CORP 13.96% CIRCUIT CITY 12.49% ZIMMER HLDGS INC 9.66% BEST BUY 8.45% CENTEX CORP 8.11% Boom.

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