INVESTING
INSIGHTS, ANALYSIS, NEWS & TOOLS
PRINT
EMAIL
DEL.ICIO.US
DIGG THIS
Buying stocks on the say of a brokerage analyst is a bit like trusting the TV weatherman. He seems to know what he's talking about, and his forecasts are often on the money. But sometimes he is very, very wrong, and when he is, you're the one who gets soaked. So whose research should you rely on?
We sought the answer to that question and got some big surprises -- four of them, to be exact. Four of the six top-ranked providers of stock-buying advice are firms you've probably never heard of. And the number-one stock adviser could fit its entire staff into a luxury suite at Petco Park in its hometown of San Diego.
RELATED STORIES | |||
 |
Compare brokerages' research offerings | ||
|
|
Interview with a veteran fund manager | ||
|
|
Stock Finder | ||
We asked Investars, a New York City-based firm that analyzes stock-research providers, to identify the top-performing firms, ranked by the profitability of their buy and sell recommendations over the past two years. Two well-known firms, Wachovia Securities and Raymond James, make our list of the six best research providers. But the four others in our top six are all obscure shops that rely exclusively on proprietary, computer-driven stock-picking systems.
Traditionally, access to research has been a perk of doing business with full-service brokers. But that's no longer the case. Fidelity, for example, offers analyst reports from a dozen providers to its brokerage clients. Most other discount brokers offer reports from at least a handful of research firms.
The increasing availability of research owes much to a 2003 legal settlement that penalized 12 Wall Street brokerages for issuing conflicting advice during the stock-market bubble that began in the late 1990s. In addition to assessing roughly $1 billion in penalties, the settlement required brokerages to pony up $450 million over five years to supply independent research to clients. Now, for every stock opinion they issue, the dozen brokerages must supply a second opinion. The idea is that independent research will make brokerages think twice before cynically touting a stock in order to land lucrative investment-banking deals.
Who won the race
The pact also required the 12 big brokers to submit their stock-recommendation data to companies, such as Investars, that track the research providers' records. All told, Investars follows 130 research providers. Among those that don't supply data are Morningstar and Value Line Investment Survey, which cater primarily to individuals (see Advisers for the Masses). Also not rated were Charles Schwab's picks, which scored well in a recent ranking of brokerage model portfolios conducted by a rival of Investars. The rankings here exclude those firms and others that don't make their data publicly available.
Investars ranks a firm on the performance of a hypothetical $10,000 portfolio of stocks for which a firm has issued buy and sell recommendations. (Stocks rated sell are sold short, which means the hypothetical portfolio gains when they fall in price.) We limited the field to companies that cover 500 or more stocks, which encompasses most of the best-known research outfits. We picked a two-year ranking period because data from many independent firms became available about the time that the Wall Street money began flowing their way in 2004.
There is a danger, of course, in using such a short time period. Market conditions over the past two years may have favored the highest-ranked firms. The picture will become clearer with time. And because we focused on research available to investors of normal means, we eliminated from consideration firms that serve only institutional investors and the super wealthy.
|
E-MAIL ALERTS: Keep up-to-date with the latest Kiplinger has to offer
SAVE, SHARE & DISCUSS:
 |
 |
 |
 |
 |
ADD HEADLINES:
SPONSORED LINKS
 |
Reprint Article
