The Daily Workshop Report
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (Sept. 22, 1997) -- First off, some housekeeping. For those of you who missed last Monday's report, Robert Sheard is currently on sabbatical and you have the misfortune of being stuck with me for another week. Yes, the cards and letters have poured in asking for relief from my musings, but sorry, you're outta luck folks.

As for updating the daily results for the various screens at the bottom of the report, we are currently working on solving that. I was unaware until Thursday that the only other way to access the current rankings was to go to the screen's description (in the listbox to the right on AOL or the nav bar to the left on the Web) and then to go to another page that had "Current Rankings." Although we have the spreadsheets that Robert uses to generate part of the numbers, the actual changes in the rankings and when they are made are somewhat opaque to us at the moment. Rest assured, when we figure all of this out, probably by tomorrow, we will start adding them again.

As for the Workshop design in general, we are working on an overhaul for the entire Workshop Area right now and one of the things we will do is make sure that the numbers are more accessible for users on a daily basis. Anyone with any input on how to redesign the Workshop to add some value should feel free to send me an e-mail at [email protected] as the Workshop falls under the News and Research bailiwick of which I am officially in charge. I will forward any suggestions to Robert and hopefully he and I can firm something up when he is back next week.

Now, onto the two stock screens I want to look at this week -- Beat Estimates and Missed Estimates. Both look for companies that have made quarterly earnings estimates or missed them in the prior quarter. The emphasis on this estimate beating thing is the cockroach theory, a pretty well-tested phenomenon that basically argues that earnings surprises are like cockroaches -- if you get one, you are gonna have a lot more. We are looking for companies that missed or beat estimates by 9% where sales are advancing or declining by 15% or more in order to ferret out the more interesting possibilities. These screens, like the ones profiled last week, are brought to us by Sharon Hegeman (TMF Rockie).

Now, these screens, like the ones last week, fall in the "idea-generating" category. That means that when these were designed, they were not designed to be mindlessly implemented. Now, perhaps it is my bias as someone who looks at companies every day, but I tend to think that when mechanical models work, they profit from systematic inefficiencies in the market where the very discovery and popularization of the model eventually closes the gap. We have seen interesting evidence of this as the outperformance of estimate-beating companies has narrowed noticeably over the past five years since the use of estimates became widespread among all investors. As well, approaches emphasizing sequential momentum in earnings or revenues have also declined.

Why should investors look at a screen that does not generate 100% positive hits? Or one that might generate no ideas for a given week... or a given month? Simply because unless you are a trader moving into and out of positions on a monthly basis, one or two good ideas a year are wonderful -- particularly if you would not have come upon them any other way. The estimate screens have introduced me to a company or two in the past that I would have not found otherwise, and this is why I think they are good tools for investors. Tomorrow, we will get down to analyzing one screen to see how you can use it to generate a lead.