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Brokerage Emphasis Lists Are Frivolous

Most brokerage firms sport their top stock picks in a high-profile emphasis list. These featured rankings are amateur hour. While they often flaunt a statistical case that such Buy collections outperform the market, these “best” recommendations do not perform materially better than all the other favorably rated stocks lacking such exalted status at that firm. Such comparisons are glaringly absent in brokerage research because they are too embarrassing. Barron’s quantifies the brokers’ model portfolio performance every six months using Zacks Investment Research statistics. The record isn’t pretty. In 2006, the average brokerage recommended list underperformed the S&P 500. The leader was Matrix USA, not exactly one of the biggest firms on the Street. Over a five-year period, they lagged again, ahead only 44% on average compared to the S&P 500 equal-weighted total return of 69%. The five-year winner was a firm that has no in-house fundamental research analysts—Charles Schwab! What does that tell you?

Like a zephyr, emphasis list ideas blow in and out. Selection committees can be a charade. If they need a new name to add to the exclusive list of best recommendations, the technical chartist might suggest those Buys that have good charts. Analysts in the firm are called and possibilities are trial ballooned. Their decisions are often surprising. The most perplexing aspect is the rather frivolous manner by which these lists are maintained. Assuming a one-year investment time horizon, panic and anxiety can strike these committees when a stock moves a few points. Hip-shooting is common; emotions and stock price charts rule the day. There seems to be no consistent, longer-term, investment-oriented approach. An analyst’s best recommendation can be yanked despite protest after falling a few points. Even if it recovers, the name is long gone from the list.

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