Unless picking stocks is your full-time job, you can probably use some help finding attractive opportunities or getting a feel for what makes a company tick. But with everyone from Jim Cramer to your broker vying for your attention, you face a surfeit of options.
As with choosing an adviser, the key to finding good stock research is to identify an outfit that shares your investment philosophy, says Robert Stammers, director of investor education for the CFA Institute, which administers the chartered financial analyst designation. “You’re using them to reduce time and effort, so you need to find someone who thinks the same way and asks the same questions you do.” Here are our reviews of a few sources you may be considering.
Wall Street Research
This is also called sell-side research because it’s produced by investment banks, which sell securities to clients. In general, you should disregard the “buy,” “sell” and “hold” ratings of sell-side analysts. Their compensation is often tied to the fees their firms earn for trades on stocks an analyst covers (the hotter a stock, the more clients want to trade it). Plus, analysts often follow their employer’s investment-banking clients. Those considerations may lead to unwarranted bullishness or cause an analyst to pull his punches when the facts might otherwise dictate a bleaker view.
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But analysts’ profit estimates are helpful when figuring a stock’s price-earnings ratio. Moreover, revisions to estimates can provide an indicator of how informed players see a company’s business prospects changing. You can find data on estimates free at Yahoo Finance.
Independent Research
This category includes firms that offer access to their reports on a subscription basis or through discount brokers. S&P Capital IQ, formerly known as Standard & Poor’s, tracks 1,600 stocks. Its reports reach some 20 million people, including clients of many discount brokers. S&P analysts seek companies with strong growth prospects that also trade for meaningful discounts to the analysts’ price targets, says Stephen Biggar, S&P Capital IQ’s global director of stock research. “We try to provide the basis for our opinion in a way that leaves the reader with a good understanding of the company,” he says.
Reports from Argus Research are also ubiquitous among discount brokers. Rather than boil the ocean, Argus focuses on 450 U.S. stocks, including the largest 200 companies by market value and about 250 stocks “that clients are asking about,” such as Facebook and LinkedIn, says president John Eade. Analysts use a six-step process that begins by examining the outlook for the economy and a firm’s industry. They then study a firm’s business model, financial strength and management, analyze the risks and conclude by looking at a stock’s price.
A premium subscription to Morningstar gets you access to reports on 1,800 companies. In the spirit of Warren Buffett, Morningstar’s analysts favor companies with a wide “moat,” or defensible advantage, and stocks that sell at a discount to a firm’s true worth, which they estimate by forecasting future cash flows. Morningstar says that since it started rating stocks in June 2002 through July 31, wide-moat companies with “buy” ratings returned 17.8% a year, compared with 5.6% for Standard & Poor’s 500-stock index. Among stocks fitting the bill today are Cisco Systems, Martin Marietta Materials and Western Union.
For a quick study, it’s hard to top the Value Line Investment Survey, which reduces its analysts’ research on about 1,700 stocks down to one-page summaries that contain a dazzling array of numbers and succinct commentary. In addition to offering its analysts’ opinions, Value Line spits out Timeliness Rankings, which factor in earnings trends and stock-price movements. The top 100 names represent Value Line’s best ideas for stock-price results over the next six to 12 months. Over the past decade, the top picks gained an average of 3.6% annualized.
Newsletters
Mark Hulbert, who produces the Hulbert Financial Digest, has been tracking investing newsletters for decades. Among the 180 letters he follows, The Prudent Speculator is a top pick for long-term performance. Its recommendations have returned 10.6% annualized over the past ten years. John Buckingham, who also manages the Al Frank Fund, edits Speculator. He assumed the solo lead role at the fund and the newsletter when founder Al Frank died in 2002. Buckingham looks for stocks that are cheap according to such measures as price to earnings, sales and book value (assets minus liabilities).
Hulbert also maintains an honor roll of newsletters that have produced above-average returns in both bull and bear markets for more than ten years. Investor Advisory Service is the top performer since Hulbert created the list in 1998; it has returned 10.2% annualized over the past ten years, compared with 6.3% annualized for the S&P 500.
The newsletter is published by ICLUBcentral, which also sells stock analysis software to investment clubs, but its analysis comes from Seger-Elvekrog, a money manager based in Novi, Mich., that oversees about $300 million. Scott Horsburgh, president of Seger-Elvekrog, says his team looks for firms with sustainable, double-digit earnings growth and stocks whose P/Es are below their long-term average P/Es. The aim is to pick stocks that can double in five years. “We look often and buy seldom,” he says.
Another top performer on Hulbert’s honor roll is Zacks Premium. The letter’s strategy is based on research by CEO Leonard Zacks, who found 30 years ago that stocks tended to perform well when analysts raised earnings estimates for the underlying companies and typically performed poorly when analysts trimmed profit forecasts. In addition, when quarterly earnings top or trail estimates, the trend is likely to repeat in the next quarter, causing the stock to rise when profits beat estimates or fall when they lag them. Zacks Investment Research’s 85 analysts bird-dog brokerage analysts’ estimates and earnings surprises to produce a portfolio of up to 100 stocks. The letter’s picks returned 9.7% annualized over the past ten years.
Web Resources
David Jackson, founder and CEO of Seeking Alpha, says too many sources of stock research underestimate the intelligence of their readers by assuming their audience needs to be told what to think. “There are always two sides to any stock story,” he says. “There are bulls and bears.” His Web site tries to provide investors with a broad range of perspectives, “so they’re empowered to make up their minds.”
Points of view abound. This is a great place to get a sense of how other investors view a company’s fortes and foibles. Jackson thinks the writing on the site is more compelling than other sources because Seeking Alpha’s authors have real money at stake on the ideas they share (writers must disclose any positions relevant to a post, although the site is limited in how stringently it can enforce this). Seeking Alpha also offers free transcripts of conference calls that company officials hold after releasing quarterly earnings reports. The calls are a great source for getting a sense of the boss’s own expectations.
For the self-directed investor, little can beat the comprehensiveness and depth of Yahoo Finance. Fan Barry Ritholtz, author of The Big Picture blog, says he can still remember the dinosaur age when instead of sailing through a few clicks, investors had to thumb through a physical tome to find analysts’ estimates, biggest shareholders and other facts about a company. “Yahoo Finance has a ridiculous amount of information in one space,” he says. “It’s mind-blowing how much stuff is free.”
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