That Schwab/Forsythe article in Barron's really took me aback. I liked Mr. Forsythe's ideas and conclusions about brokerages and p/e. This part got to me though:
"Among other things, SER (ed. the Schwab's model) compares inventories to sales, that is, a balance-sheet account with an income account. Traditional analysis loves high profit margins and strong returns on equity, but Forsythe says the former has zero correlation to stock returns and the latter just 'some value" In fact, the 'ratio of free cash flow to equity gives you more insight into future stock returns,' he says."
That's a shock, and it's scary to me. I certainly see where inventory:sales ratio is important, and of course also free cash flow. My way of looking at stocks focuses heavily on evaluating profit margins against the stock price and return on equity to stock price. If Mr. Forsythe's right, I've got it ALL wrong. Yikes. Perhaps my results are only random. That would hurt, considering how much effort I put into my models and picking stocks thereby.
In the example given (2 top-rated picks from each of 10 sectors), I see where the majority have worked out very well, if they were recommend when their stock prices were lower in the past twelve months. For me, I just don't like to see so many stocks still being recommended even as their stock prices are at record highs.
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