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Brokerage Emphasis Lists Are Not Credible

Most brokerage firms sport their top stock picks in a high-profile emphasis list. Carrying titles such as Focus List, Alpha List, and, my favorite, Americas Conviction Buy List, these exalted rankings are really just amateur hour. Although Street firms often flaunt statistics showing that their Buy collections outperform the market, these “best” recommendations do not perform materially better than all the other favorably rated stocks lacking such lofty 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 is not 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!

In mid-2007, the results were still dismal. The brokers’ lists lagged the S&P 500 again during the previous 12-month span. In the rankings for all of 2007, five brokers’ best Buys outperformed the market while nine lagged. During the first half of 2008, seven firms outperformed while six underperformed. The focus lists of all but one declined in absolute terms, so you would have lost money with their best recommendations. A roll of the dice probably would have had superior results.

Like a zephyr, emphasis list ideas blow in and out. Selection committees can be a charade. If a new name is needed 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 lists are maintained in a rather frivolous manner. 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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