Schwab's Stock-Picking Prowess
Charles Schwab & Co. isn't the first name that comes to mind when you think about stock advice. In fact, when Schwab began its computer-driven rating system three years ago, the critics panned it as a mechanistic toy. But lo and behold, in a run-off of brokerages' model portfolios conducted by Zacks Investment Research, Schwab's 100 highest-rated stocks possessed the best three-year track record by a long shot, leaving competitors like Merrill Lynch and Smith Barney in the dust.
From 2002 through 2004, Schwab's recommended list returned an annualized 15%, versus 4% for Standard & Poor's 500-stock index. Credit Suisse First Biston came in a distant second, at 9% annualized. Smith Barney's and Merrill's picks returned a puny 2% per year.
Schwab's stock picking prowess came with the acquisition, in 2000, of Chicago Investment Analytics, a research firm that catered to big money managers. The system Schwab acquired is strictly numbers-driven.
The system looks for attributes that spell future success for a stock. For starters, it looks at the quality of a company's earnings - whether they come from increased sales or more efficient operations, instead of one-time events. In determining value, a low price relative to earnings is important.
To judge sentiment toward a stock, the rating takes its cues from the smart money investors, such as companies that buy back their own shares. Then it factors in signs of risk, such as whether earnings growth has been on a steady track.
Every week, Schwab puts 3,000 firms through their paces. The stocks are ranked and assigned letter grades of A, B, C, D or F. To construct its 100-stock model portfolio, Schwab picks from among the 1,000 largest companies in proportion to the makeup of sectors in the S&P 500. So if a sector makes up 10% of the index, the model generally includes ten stocks from that group.
The top 100 recently included names such as 3M, Barnes & Noble, Cigna, Electronic Data Systems, Valero Energy and Verizon.
Ironically, Schwab doesn't put this 100-stock model portfolio in front of its customers. To learn what's in it, you have to ask a Schwab rep. And if you're not a Schwab customer, then you're out of luck. The list is for clients only.
* * * * *
From 2002 through 2004, Schwab's recommended list returned an annualized 15%, versus 4% for Standard & Poor's 500-stock index. Credit Suisse First Biston came in a distant second, at 9% annualized. Smith Barney's and Merrill's picks returned a puny 2% per year.
Schwab's stock picking prowess came with the acquisition, in 2000, of Chicago Investment Analytics, a research firm that catered to big money managers. The system Schwab acquired is strictly numbers-driven.
The system looks for attributes that spell future success for a stock. For starters, it looks at the quality of a company's earnings - whether they come from increased sales or more efficient operations, instead of one-time events. In determining value, a low price relative to earnings is important.
To judge sentiment toward a stock, the rating takes its cues from the smart money investors, such as companies that buy back their own shares. Then it factors in signs of risk, such as whether earnings growth has been on a steady track.
Every week, Schwab puts 3,000 firms through their paces. The stocks are ranked and assigned letter grades of A, B, C, D or F. To construct its 100-stock model portfolio, Schwab picks from among the 1,000 largest companies in proportion to the makeup of sectors in the S&P 500. So if a sector makes up 10% of the index, the model generally includes ten stocks from that group.
The top 100 recently included names such as 3M, Barnes & Noble, Cigna, Electronic Data Systems, Valero Energy and Verizon.
Ironically, Schwab doesn't put this 100-stock model portfolio in front of its customers. To learn what's in it, you have to ask a Schwab rep. And if you're not a Schwab customer, then you're out of luck. The list is for clients only.
* * * * *
posted by Bob Moser at
9:28 PM
0 Comments:
Post a Comment
<< Home