Markets
Who Picks the Best Stocks
We help you sift through the jumble of voices telling you what to buy and what to sell.
By David Landis, Contributing Editor
From Kiplinger's Personal Finance magazine, April 2006
Advertisement
We look at the six top-rated companies and some of their recent stock picks. They are listed in order, starting with the best.
Ford Equity Research, the number-one firm, uses computers to dispassionately evaluate stocks. Such quantitative shops have been around for years, although they are not well-known or easily understood by the public. If their success in these rankings is any indication, they are due a lot more attention.
Ford's proprietary system relies on "a combination of value and growth" elements, says research director Richard Segarra. The computer model arrives at a stock's value by looking at its historical and anticipated earnings growth, as well as its price relative to similar companies. It then uses a measure of price momentum to verify the attractiveness of a stock. The San Diego firm employs just 16 people and covers about 4,500 U.S. stocks. Ford's research is available to individuals through Banc of America Securities, Fidelity, Merrill Lynch and T.D. Waterhouse.
Among Ford's current buy-rated stocks is Chesapeake Energy (symbol CHK), which explores for natural gas primarily in the Southwest and the Gulf Coast region. The stock, recently $30, has been a favorite of energy investors, particularly since Chesapeake chairman Aubrey McClendon bought more than $44 million worth of stock (and president Tom Ward bought $34 million worth) in December and January. Ford also rates financial-services giant Merrill Lynch (MER), at $73, a buy. Although Merrill doesn't rank high for earnings or price momentum, Ford says analysts' earnings estimates are showing a positive trend.
Raymond James is the top-ranked firm that examines stocks the old-fashioned way, with analysts who add a layer of human judgment to their financial calculations. "You can't have a vision of what is going to change on the landscape unless you have somebody down there looking at trends and new competitive factors," argues David Henwood, the firm's chief investment officer. James, based in St. Petersburg, Fla., employs 44 analysts and 42 research associates, and it follows 625 companies, most of them midsize. Its research is distributed to institutional clients and 1.3 million of its individual customers.
One happy Raymond James customer is Chip Gaylor. The 42-year-old trust and estates lawyer in Venice, Fla., uses the company's analyst reports to help him pick stocks for his own portfolio and for his clients' trusts. "I find that the information and recommendations are useful, and they've been pretty much on the money with their forecasts," he says.
Among recent additions to the firm's Focus List, a collection of its highest-rated stocks, is Hilton Hotels (HLT), which plans to merge with U.K.-based Hilton Group to create the world's largest hotel company. Analyst William Crow likes the company's property portfolio in key U.S. business markets and projects 12% to 14% annual earnings growth ahead. The stock, recently $25, could be worth $29 in a year, Crow says. Raymond James also gives a strong buy rating to American Tower (AMT), an operator of wireless and broadcast communications towers. Analyst Ric Prentiss says the company's strong free-cash-flow growth is beginning to attract investor attention. He says the stock, recently $31, could hit $35 in a year.
Columbine Capital employs a mere seven people, but this Colorado Springs quant shop rates nearly 30,000 stocks from around the globe. Its computers evaluate stocks according to a series of value measures and share-price momentum factors, such as a stock's performance relative to the market.
John Brush, 66, who once headed an Air Force research center in quantitative modeling and engineering, founded Columbine 30 years ago. His firm has some 50 institutional clients that pay up to $150,000 a year. Now that it is providing research for Wall Street customers, Columbine has joined with several other quant shops to hire writers from India to produce reports presenting its data in easy-to-understand terms. Columbine reports are available through Fidelity.
One stock Columbine recently upgraded to its top buy rating is Cemex (CX), a Mexican cement maker that is a play on an explosion in construction in emerging markets. In Columbine's model, the stock's 56% advance over the past year, to $59 in mid February, is a big plus because it confirms other factors in Cemex's favor. Among them: a price-to-book-value ratio of 2.4, which is a reasonable valuation compared with other stocks in its sector. Another top-ranked stock is SkyWest (SKYW), a profitable airline that flies regional routes under contract to major U.S. carriers. Columbine gives the stock its top ranking for forecasted earnings yield (estimated earnings divided by price, or the inverse of the price-earnings ratio) and calls the stock, at $28, "greatly undervalued."