By Numer de Guia, CFA
Please see the note regarding changes to Standard & Poor's STARS ranking system.
Most weeks in this column, we use Standard & Poor's Stock Appreciation Ranking System as a key criterion in helping us uncover attractive investing ideas. STARS, as it's more commonly known, is a ranking system based on fundamental research conducted by S&P analysts. Over 1,500 issues receive STARS rankings.
The STARS system's long-term track record speaks for itself. From its inception Dec. 31, 1986, through Oct. 31, 2004, the portfolio of stocks with S&P's highest ranking, 5 STARS (strong buy) posted an aggregate TOTAL RETURN of 1,316%, vs. a 366.7% return for the Standard & Poor's 500-stock index. What about the shorter-term? Well, thus far in 2004 (through Oct. 31), the gain in the 5-STARS have also topped that of the "500" by a tally of 6.1% to 1.6%.
While that info is nice to know, equity investors probably want some names to go along with the numbers. We're happy to oblige.
Our screen this week is rather basic. S&P equity analysts predicted 12 months ago that the 22 stocks listed below would outperform the market, as all of them were ranked 5 STARS back in October, 2003.
Flash forward one year. These issues did indeed post total returns greater over the 12 months through October, 2004, than the S&P 500's figure of 9.42%. And they are are still ranked 5 STARS today -- meaning S&P analysts still consider them good bets to outperform the market over the next 6 months to 12 months.
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Note: Effective Novermber 12, 2004, Standard & Poor's has modified its Stock Appreciation Ranking System (STARS) nomenclature:
• 5 STARS now designates a stock ranked strong buy, instead of the previous buy;
• 4 STARS is now buy, instead of accumulate;
• 2 STARS is now sell, instead of avoid; and
• 1 STARS is now strong sell, instead of sell.
The 3 STARS ranking remains as hold.
De Guia is an analyst for Standard & Poor's Portfolio Advisors