VIVIENNE HSU
PORTFOLIO MANAGER
SCHWAB SMALL CAP EQUITY FUND AND PREMIERE EQUITY FUND

COMPANY: AMR Corporation
TICKER: AMR (NYSE)
PRICE: $26.99 (as of 4 p.m. yesterday)
52-WEEK RANGE: $8.40-$26.99
MARKET CAPITALIZATION: $5.02 billion

Vivienne Hsu is a portfolio manager at Charles Schwab. AMR Corporation is the parent company of American Airlines the largest airline in the world. Ms. Hsu spoke to David Dalley of The New York Sun and explained, using Schwab’s in vestment methodology, why AMR is a good investment.

Why do you like AMR?

We evaluate stocks based on the Schwab Equity Rating, which looks at every company based on four broad cat egories: fundamentals, valuation, mo mentum, and risk. For AMR, three of the four are quite strong, specifically the fundamentals, valuation, and risk.

What do you look at in terms of fundamentals?

We’re trying to capture the financial strength of the company, based on the financial statements and numbers available to the public.We look for com panies that are likely to grow more quickly than others. We look at free cash flow generation and growth, and we also look at earnings. We like cash flow because it’s hard to manipulate For AMR, free cash flow is much more positive now than it was in previous years. In the year ending December ’05 it’s about $300 million.For the five years prior, every single year was negative.

We picked AMR also because it’s em bedded in an interesting industry.A lot of retail investors are surprised by the performance of American Airlines.The stock is up close to 200% in the last year. We chose it back then by looking at the four categories.They’re designed to predict which companies are likely to surprise the market.

You said that AMR scored well in the momentum category. What do you look at there?

We not only measure price momentum, we also look at brokerage analyst sentiment.We don’t just look at analyst A versus B, we look at them as a group. If nine are upgrading, that’s sentiment momentum.

Why was AMR attractive in the valuation category?

Most people talk about valuation in in terms of price-to-earnings or priceto-book ratios.We have our proprietary formula, but basically we ask: Is it valued fairly? Instead of just looking at things like P/E, which looks at valuation in respect of the market, we look at the market itself.What is the valuation from an informed investor perspective? We look at two main groups – the company itself and the short sellers. If the company thinks that they are undervalued, then they may buy back stock. That’s an indicator that they think it’s cheap. The other group is the short-sellers. In general, to us it seems like they have more information than the average investor. If they’re playing that stock heavily, that’s negative.

What are the main risks to AMR?

The main risk is the fact that it’s in the airline industry. It’s a struggling industry, but at the same time American is the largest player.And the industry is showing signs of improvement. Today in the news, for example, a couple airlines were talking about charging extra for certain types of seats, aisles, or exit rows. That demonstrates that pricing power is back in the industry. There’s strength there.