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Strategy Tear Sheet Most Recent Strategy Calls… Brian G. Belski 612.303.1503 / [email protected] Adam J. Freeman 612.303.1509 / [email protected] Chad E. Klatt, CFA 612.303.1506 / [email protected] Cash Is King ~ February 14, 2005 Market Pulse We Believe Investors are “Overlooking” Balance Sheet Strength Of Corporate America Small vs. Large Monthly Model Review ~ February 7, 2005 Q4 Earnings Scorecard ~ January 31, 2005 Consensus Negativity ~ January 24, 2005 Financial Sector Differentiation ~ January 18, 2005 Identifying Growth vs. Value Groups ~ January 10, 2005 January 3, 2005 ~ 2005 Stock Lists Earnings Contrarian, Growth At A Reasonable Price (GARP), Yield Prospects 2005 Outlook ~ December 10, 2004 Growth vs. Value See “Market Pulse” Slide for details January Effect ~ November 22, 2004 Outside The Box ~ November 1, 2004 Technology Overweight ~ September 22, 2004 Health Care Overweight ~ September 20, 2004 Please call or e-mail for complete reports Valuation Weightings Please click on buttons for further analysis on each subject Disclaimer Updated as of: 2/14/2005 Market Pulse 2005 Outlook We believe the stock market (as defined by the S&P 500 Index) will see a peak price level of at least 1350 during the year. > As a result, stocks will likely post surprisingly positive returns for a third consecutive year. > Leadership will likely be defined by companies exhibiting quantifiable fundamental growth characteristics and results. > We believe investors should focus on growth companies relative to the value leadership of the past several years. > Differentiated fundamental trends will lead to increased micro strategies and decreased “blanket” conclusions. What CLIENTS want to talk about…. S&P 500 EPS Growth Model • Energy: Will leadership extend into 2005? • Tech: Does the “recovery” have staying power? 25.00 20.00 • Cash levels remain HIGH 15.00 •Dividend investing and “trading range” talk are dominating forward market trend opinions 10.00 In addition, momentum remains a longer-term positive for a majority of sectors and indices. Main Page Sep-06 Dec-05 Mar-05 6/2004 9/2003 12/2002 3/2002 6/2001 9/2000 12/1999 3/1999 6/1998 9/1997 3/1996 -10.00 12/1996 However, is not positive growth still positive growth? -5.00 6/1995 Yes, the rate of growth will most likely decelerate in 2005 (high single-digit versus low double-digit percentage growth in 2004). 0.00 9/1994 Earnings Analysis Earnings are still growing… 5.00 12/1993 • Health Care: Drug hangover “skewing” performance Earnings Analysis 1.00 Growth 0.90 Consensus projections of 10-12% growth over the next 3-4 quarters are likely too low. 0.80 1.00 0.70 0.60 0.00 0.50 0.40 Near-term momentum models solidifying; longer-term net positive trends intact. 0.20 0.10 2005 Price Target = 1350 Fiscal Year 2 Main Page Fiscal Year 1 December November October September August July June May April believe forward assumptions are too conservative, with further upward revision strength likely. March EPS Momentum + Growth - Long-term positive trends remain intact; we February Conclusions S&P 500 Earnings Seasonality 0.200 0.150 0.100 0.050 0.000 (0.050) (0.100) (0.150) January 1/31/2005 6/2004 11/2003 4/2003 9/2002 2/2002 7/2001 5/2000 12/2000 3/1999 10/1999 8/1998 1/1998 6/1997 11/1996 4/1996 9/1995 0.00 2/1995 -2.00 Momentum PJC S&P 500 Projections EPS: $70.88 – 2005 EPS: $77.27 – 2006 0.30 -1.00 Revision Ratio % Change in EPS Revision 2.00 Small vs. Large Relative Valuation - Russell 1000 vs. Russell 2000 Relative Perform ance - RUT vs. RUI (Monthly) 0.50 1.20 0.40 1.10 0.30 0.20 1.00 0.10 0.90 0.00 0.80 -0.10 1/2005 5/2003 9/2001 1/2000 5/1998 9/1996 1/1995 5/1993 9/1991 1/1990 5/1988 0.60 P/FE Rel. Val. P/CF Rel. Val. 2/01/2005 3/2004 4/2003 5/2002 6/2001 7/2000 8/1999 9/1998 10/1997 11/1996 1/1995 12/1995 -0.20 0.70 P/S Rel. Val. Re lative Pe rform ance - RUT vs . RUI (Daily) 1.20 Fundamentals… 1.10 Performance… 1.00 Large-cap valuation discounts proceed Longer-term: Potential Peak Shorter-term: Decelerating 0.90 Main Page 2/09/2005 10/13/2004 6/17/2004 2/19/2004 10/21/2003 6/25/2003 2/27/2003 10/29/2002 0.80 7/03/2002 Conclusion Large-cap poised for fundamentally driven “run;” Small-caps losing steam and increasing “expensive” Growth vs. Value Russell 1000 Grow th vs. Russell 1000 Value Take-Away 1.06 1.05 1.03 1.02 1.00 0.99 0.97 0.96 0.94 Russell 1000 Indices - Value outperformance likely extended; we expect growth to close the relative gap over the next 2-3 quarters Russell 2000 Indices - Despite longer-term relative discount, value becoming Grow th Value 2/04/2005 12/17/2004 10/29/2004 9/10/2004 7/23/2004 6/04/2004 4/16/2004 2/27/2004 1/09/2004 11/21/2003 10/03/2003 progressively more expensive Relative Valuation - Russell 2000 Value vs. Russell 2000 Growth 0.00 -0.05 -0.10 -0.15 -0.20 -0.25 Fundamentals… -0.30 Growth = Deep relative valuation discounts to market and value persist; growth expectations likely too conservative Performance… -0.35 -0.40 Main Page P/FE Rel. Val. P/CF Rel. Val. P/S Rel. Val. 3/2004 2/01/2005 Conclusion Long-term focus = High-quality growth companies 4/2003 5/2002 6/2001 7/2000 8/1999 9/1998 10/1997 11/1996 12/1995 1/1995 -0.45 Value trends are testimony to defensive investing posture Valuation Analysis Indices Overall contraction intact; small- and mid-cap still trading at premium to large-cap market Valuation - Price / Forw ard EPS 30 25 Differentiation Growth sector contraction creates opportunity 20 Conclusion 15 Market NOT as expensive as consensus believes 10 Russell 2000 S&P 500 Conclusions S&P 500 Main Page Average Upper (+1 SD) 1/31/2005 2/2004 3/2003 4/2002 S&P 500 Valuation - According to our PPV model (which takes into account 5/2001 6/2000 7/1999 8/1998 9/1997 10/1996 11/1995 12/1994 S&P 500 Valuation Model Lower (-1 SD) P/FE, P/S, P/CF, & P/B) the S&P 500 is trading below its average 10 year multiple. Cheap or Expensive?? - On a relative and absolute basis, small-cap multiples are trading at a premium to large-cap. 2/09/2005 6/24/2004 11/04/2003 3/20/2003 8/01/2002 12/12/2001 4/23/2001 9/01/2000 1/18/2000 6/02/1999 10/13/1998 2/26/1998 5 Sector Weightings S&P 500 Index 6-12 Month Weighting Russell Mid-Cap Index 6-12 Month Weighting Russell Small-Cap Index 6-12 Month Weighting Consumer Discretionary Market Weight Autos & Transportation Market Weight Autos & Transportation Market Weight Consumer Staples Market Weight Consumer Discretionary Market Weight Consumer Discretionary Market Weight Consumer Staples Market Weight Consumer Staples Market Weight Energy Underweight Financials Market Weight Energy Underweight Energy Underweight Health Care Overweight Financials Underweight Financials Underweight Industrials Overweight Health Care Overweight Health Care Overweight Information Technology Overweight Materials & Processing Market Weight Materials & Processing Market Weight Materials Market Weight Producer Durables Overweight Producer Durables Overweight Telecommunication Services Market Weight Technology Overweight Technology Overweight Utilities Underweight Utilities Underweight Utilities Underweight The Positives ~ Sectors to Overweight Overweight Health Care: Earnings Consistency + Contracting Aggregate Multiples = Long-Term Key Overweight SPX Industrials and RMC/Rut Producer Durables: Earnings Growth Recovery + Long-Term Revision Strength + Peak P/E Valuation = Traditional Upward/Positive Change In Cycle Overweight Technology: Tech earnings are NOT as bad as consensus believes + Fundamental SEASONALITY is turning positive + Valuation contraction is attractive = Appetite for growth investing vs. current “defensive posture.” Main Page The Negatives ~ Sectors to Underweight Small- & Mid-Cap Financials: Earnings: We believe momentum has peaked. Macro Pulse: Treasury yield spread contraction is potentially negative to forward earnings. Valuation: Small- and Mid-Cap Financials are among the most expensive areas in the market. Energy: Earnings: We believe momentum has peaked and is decelerating. Macro Pulse: The sector is very over-owned by institutions. Valuation: Multiples are volatile and not necessarily “cheap.” Utilities: Earnings: We believe momentum is reversing (negatively). Macro Pulse: High yielding stocks have actually underperformed. Valuation: Multiples are very expensive – near historical highs. Analyst Certification—Brian G. Belski The views expressed in this report, including the Key Points and Risk sections in particular, accurately reflect my personal views about the subject Company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. 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