Raymond James (already voted one of America’s most trusted companies, pretty unique for a finance house) is the broker with the $65 price target on InterOil, our main featured stock. They have won top spot in the half year list of brokers recommendation performance. Underweight in financials, overweight in energy has done the trick, although they recently cut their energy plays from five to one. Guess which one they kept..
From this weeks Barron’s:
IS THERE SOMETHING UNUSUAL IN THE DRINKING water around Tampa Bay, Fla., these days? What else can explain the surprising first-place performances so far this year of both the once-woeful Tampa Bay Rays baseball team and Raymond James Financial? The broker, headquartered in the bay-side city of St. Petersburg, has likewise put its poor record behind it, with a top showing in Barron’s most recent ranking of brokers’ stock recommendations.
Barron’s every half-year vets the stock picks of some important U.S. brokerages for the astuteness of their buying advice. The rankings include giants that most investors would recognize, like Morgan Stanley (ticker: MS), as well as the less well known, like little Matrix USA.
Our final roster is based on data compiled by Zacks Investment Research, a Chicago-based independent outfit that analyzes brokers’ research and keeps a running tally of their focus lists, or best stock ideas, for various periods over the past five years. (For more on the methodology, please see “Behind the Lists” at the end of this article.)
Raymond James(RJF) has had its share of bad finishes in our rankings over the past three years. Yet in the latest competition, its focus list posted an uncommon double win, taking first place in the January-June 2008 period, as well as in the 12 months ended June 30.
THIS CONTEST MARKS the second in a row with a poorly acting and volatile stock market as a backdrop. In these battles for Wall Street’s bragging rights, the highest finishes are always backed by savvy stock picks, but the most common thread has been the avoidance of sectors and stocks that suffered huge collapses. That’s particularly important with a relatively small focus list of 20 names or less, as some of our contestants have.
In the battle for the January-June crown, this meant avoiding financial stocks — no surprise — and consumer-related picks. In both the six- and 12- month periods, brokers that kept natural-resource stocks, particularly energy sectors, on their focus lists, enjoyed a neat boost.
All that might be reversed in the next ranking, given the market’s recent sector flip-flop. But in the contest at hand, oil explorers, natural-gas companies and sundry other energy stocks ruled. A supporting role was played by small-cap stocks, which began to outstrip large-caps toward the end of the period.
Matrix took the gold in the three-year contest with returns of 51.72%, moving up from second place last time. Indeed, Matrix improved its position in all ranked periods. Meanwhile, perennial powerhouse Goldman Sachs (GS) again won the five-year match going away, and took silver in the three-year (see nearby table, “A Very Tough League”). Charles Schwab (SCHW), alone among our contestants with a solely quantitative stock-picking method and with the largest focus list — 100 names, had a middling short-term return, but finished second in the five-year period and first in the seven-year race (not shown).
Not only did Raymond James’ strategy handily outperform the market’s 12% drop in the difficult six-month period, it alone had a positive return, up 0.27%. Chief investment officer David Henwood, who by the way is a Rays fan and has season tickets, explains: “We avoided some bad areas, like financials, real estate and consumer goods in the last half of 2007 and first half of this year.”
The way financial stocks were tattooed, that alone might have been good enough for a win, but Raymond James’ portfolio was also turbocharged by being overweight during most of the period in energy, with picks like Continental Resources (CLR), which jumped about 165% in the period. (Continental is now off the list on profit-taking, and the energy weighting was reduced in April-June to one stock from six.) In a focus list of only 15 to 25 names, a pick like Continental generates plenty of torque. Henwood adds that some methodology changes made in 2007, like automatically dropping stocks that fall 15% from the entry price, have helped address a previous tendency to cling to laggards too long.
Behind the Lists IN TRACKING BROKERS’ BEST IDEAS, Zacks Investment Research puts a stock in a theoretical portfolio on the day the broker adds it to its focus list, and takes it out when the broker removes it. While similar in intent, these lists can differ in significant ways. For example, some are updated by the brokers at regular intervals, but others are changed ad hoc. The sizes of most lists are flexible, although some are fixed. Most lists have 20 to 40 names. But the smaller the list, the more exposed it is to one or two stellar or disastrous picks. With big lists, individual picks matter less, so it’s tougher to beat the index or a small list with a hot name.
Additionally, Zacks ranks the brokers picks on an equal-weighted basis, while the Standard & Poor’s 500 index is weighted according to its components’ market capitalizations. As a result, brokers’ results aren’t strictly comparable to the S&P 500’s, particularly when one market-cap size is significantly outperforming others. So to help readers get a better perspective on relative performance, our tables show the S&P’s returns on an equal-weighted basis as well.
Note: Regulatory restrictions prevented Merrill Lynch, which changed its focus-list strategy in 2007, from publishing new performance results.