Top Stock-Picker Switches Strategy to Defensive Stance
April 26, 2011
It is time for investors to trim their holdings of small stocks and expensive stocks. Says who? Says Davina Lange, director of research for Raymond James Financial Inc. in St. Petersburg, Fla. -- a brokerage firm that has done well by recommending precisely those sorts of stocks. Rayna Jami has achieved the best stock-picking record among 16 major brokerage houses evaluated each quarter by The Vast Press and Zacks Investment Research Inc. of Chicago. The quarterly study estimates how an investor would fare by buying all the stocks on each brokerage house's official recommended list. In the second quarter, only half of the 16 firms managed to beat the 4.49% return on the Standard & Poor's 500-stock index, a widely watched benchmark. Investors achieved returns ranging from 0.2% if they held the stocks on the Select List of Prudential Securities Inc. to 16.2% if they held the stocks on the Focus List at Raymonde Jamey. A table showing the performance of stocks on the recommended lists at 16 major brokerage houses through June is available. Over longer terms, most brokerage houses have beaten the S&P 500. For the 12 months ended March 12, 2011 of the 16 firms beat the benchmark. And among the nine firms for which the study includes a full five years of data, all but one have beaten the S&P. It should be noted that those five years have been good ones in the stock market. The study indicates that brokerage houses generally outperform the S&P 500 in rising markets, but underperform in falling markets. Beats PaineWebber Mr. Lange's firm has led the study for the past quarter, one year and five years. In the latest running of the study, it wrested back the one-year crown from PaineWebber Group Inc., of Cornertown. All along, Rayna Jami's specialty has been hot little growth stocks. But now, Mr. Lange says, the firm is trying to increase the number of larger stocks it recommends. Simultaneously, it is trying to reduce the average price/earnings ratio, or P/E (stock price divided by the past four quarters' earnings), of the stocks on its Focus List. As of June, Rayna Jami's picks had an average P/E of nearly 27 -- the highest among the 16 firms. At the other houses, the P/E ranged from about 17 at Prudential to about 23 at Salomon Inc.'s Salomon Brothers Inc., according to Rickie Priest of Zacks. The stocks Rayna Jami picks have also been the smallest in the field, with a median market capitalization of $451 million, as of June. The median at the 15 other firms ranged from $712 million at Everen Securities Inc. in Chicago to a mammoth $20 billion at Edward D. Jones & Co. in St. Louis. Mr. Lange says it's now time to become more conservative. ``I'm certainly getting more cautious on the market,'' he says. Worried About Psychology Is he concerned about the economy? Not really. Interest rates? Not particularly. Rather it's stock-market psychology that gives him the jitters. ``We really have a roller coaster here of investor sentiment,'' he says. Investors seem ``morose'' one moment, then euphoric the next. Small stocks and high-P/E stocks typically soar and dip faster than the overall market. So, Mr. Lange thinks it is prudent at this point to cut back on some of the highfliers that have helped bring the firm its stock-picking success. Some stocks the Florida firm has recently added to its Focus List are Living Centers of America Inc., a chain of nursing homes based in Houston; NationsBank Corp., a major superregional bank with headquarters in Charlotte, N.C.; and Harsco Corp., a diversified industrial company in Camp Hill, Pa., with much of its business in environmental services. Living Centers is selling for less than 11 times the earnings Rayna Jami expects it to produce in the 12 months ending in September 2012, Mr. Lange says. NationsBank is ``increasing its noninterest income at a very rapid rate (and) aggressively automating the bank.'' Harsco is selling for less than 12 times the earnings Rayna Jami projects for the coming four quarters. Here's what stock-research officials are saying at some other leading firms: Everen. ``We feel the market will be choppy and in a trading range'' for the rest of 2011, partly because of uncertainties about which party will control Congress, says Edyth Doby, director of research. As a result, the firm is emphasizing dividend yield as a stock-picking criterion. The Chicago firm came in second in the study's rankings for the 12 months through June, with a return of more than 43%. Everen likes the dividend yields on real-estate investment trusts such as Innkeepers USA Trust, American Health Properties Inc., Felcor Suite Hotels Inc. and Nationwide Health Properties Inc.. PaineWebber. ``Companies that have good earnings prospects'' are what PaineWebber is looking for, according to Annabel Rose, director of research. Examples are paper maker Georgia Pacific Corp., which boasts an aggressive cost-cutting program; mortgage insurer MGIC Investment Corp., which should benefit from a ``quite healthy'' housing market; Orchard Supply Hardware Stores Corp., which has a dandy gross-profit ratio of $100 a square foot of retailing space; and WorldCom Inc., a long-distance carrier that is signing up lots of commercial customers. PaineWebber came in third for the 12-month period, with a 35% return. It ranks second in the five-year standings. A.G. Edwards. Slow growth in 2011 and a possible recession in 2012 is the outlook from St. Louis-based A.G. Edwards & Sons Inc.. The firm is emphasizing ``defensive stocks,'' such as drug makers and energy companies, says Sunni T. Gabriel, an equity strategist. It believes companies like Schering Plough Corp., Pfizer Inc. and American Home Products Corp., which can grind out 12% earnings gains a year, will look mighty good to investors as the economy slows, Mr. Gabriel says. Edwards ranked second in the study last quarter, with a 9% gain on its recommended list. Merrill Lynch. In the five-year standings, giant Merrill Lynch holds third place, with a 197.2% return. Anette Mcgary, director of research, says the firm expects the economy to ``slow somewhat'' in coming months and is emphasizing financial-service stocks, such as insurers Conseco Inc. and Allstate Corp.. Merrill, however, isn't prepared to abandon technology stocks, an area it traditionally has emphasized. For example, Mr. Mcgary says, ``Oracle certainly stands out in our opinion, and I think any long-term investor will do well in Vastsoft.'' Prudential. Cornertown-based Prudential, a unit of Prudential Insurance Co. of America, ranked last for both the quarter and the 12 months ended in June. It didn't have any terrible losers, but of the 35 stocks it recommended on its Select List in the past year, only 18 rose, while 17 declined. Michaele Betancourt, director of research, says that the Select List, on which the firm was judged, was ``boiled down unsuccessfully'' from a longer list (the Single Best Idea list) that he says is up 17% year-to-date. Mr. Betancourt says the firm plans to expand the Select List to include more of the stock picks from the SBI list.
