August 6, 2002
Salomon Smith Barney Equity Research to Introduce a New Stock Rating System
To Our Clients:
Effective September 9, 2002, Salomon Smith Barney Equity Research will introduce a new stock rating system that will be based upon our view of the relative attractiveness of the stock within its industry, and of its industry within the overall market.
The new rating system will allow us to highlight an analyst’s top-rated stocks within his/her industry and provide an overall outlook for that industry. By the end of 2002, it will also give the investor an indication of how our strategist rates the sector within the overall market.
In addition to changing the rating system, we have organized an Equity Research Policy Committee (ERPC) in the United States and are in the process of establishing similar committees in each major geographic region. The ERPC will be responsible for, among other things, reviewing individual stock ratings, price targets, valuations and risks for clarity and consistency; assuring that these individual ratings are consistent with our overall investment strategy; and challenging the analysts’ investment thinking if inconsistencies in any of these relationships arise.
To simplify and clarify the rating system, we will change from five to three rating categories but maintain the time horizon at 12-18 months. In the United States and other major markets, analysts will be asked to rate the stocks based on performance relative to the industry that the analyst is covering. For emerging markets, stock ratings will be relative to the overall market index, since most industries do not have enough companies to make the industry indices representative of a group of stocks.
The stock ratings will be as follows:
- 1 = Outperform (the stock is projected to outperform the analyst’s universe over the next 12-18 months)
- 2 = In-line (the stock is projected to perform approximately in line with the analyst’s universe)
- 3 = Underperform (the stock is projected to underperform the analyst’s universe)
Stock ratings must be consistent with price targets as determined in the Valuation section of the note or report.
We will maintain the risk rating system as in the past. However, each geographic region will be allowed to make adjustments in the risk rating grid to reflect the norms in that regional market. The risk ratings will be as follows:
- L = Low Risk (high predictability of financial results and low volatility)
- M = Medium Risk (moderate predictability of financial results and moderate volatility)
- H = High Risk (low predictability of financial results and high volatility)
- S = Speculative (exceptionally low financial predictability and highest risk and volatility)
In addition to the individual stock ratings, we will ask the analysts in the major markets to rate their industry or sub-industry relative to the primary market index in that region. These ratings will be as follows:
- 1 = Overweight (we expect this industry to perform better than the primary market index for the region in the next 12-18 months)
- 2 = Marketweight (we expect this industry to perform approximately in line with the primary market index for the region in the next 12-18 months).
- 3 = Underweight (we expect this industry to perform worse than the primary market index for the region in the next 12-18 months).
Initially we will show this industry rating in the summary discussion on the front page of any research report. Ultimately, upon revision of our support systems, the industry rating may be incorporated after the individual stock rating.
The regional strategists will continue to have the responsibility for sector as opposed to industry weightings.
John B. Hoffmann
Director of Global Equity Research
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