A Merit Badge for StockScouter

A free research tool offered by Microsoft's MSN, StockScouter boasts an eye-catching record and ranks 6,500 issues based on a 1-to-10 scale

The implosion in Internet stock trading has rendered at least one happy result: As the weakest links among investor Web sites say goodbye, the strong get stronger. When CNBC.com this summer collapsed into Microsoft's MSN, for example, MSN users began to get timelier news. Better yet, CNBC.com's ex-users now may be tuning into MSN's superior free research tools. The latest is called StockScouter, and it's worth checking out.

You can find StockScouter by going to www.msn.com, scrolling down to the "get quote" window, and entering a ticker symbol. The resulting page will give you a stock price, but you'll also see a 1-to-10 "StockScouter Rating" (10 is best). For instance, the other day it rated Microsoft (MSFT ) shares a mediocre 6--"expected to match the market over the next six months with average risk." Stock in archrival AOL Time Warner (AOL ) received a 7. PepsiCo (PEP ) got a 10, General Electric (GE ) an 8, Ford (F ) a 5, Cisco Systems (CSCO ) a 4.

How can StockScouter predict the next six months? It can't, naturally, but it boasts an alluring record. Microsoft says that over the past 10 years, a 50-stock portfolio run according to the model would have risen 13.3% over the average six-month period, while the Wilshire 5000 Total Stock Market Index rose 5.4%. However, that does not include trading costs, which might cut annual returns by one to two percentage points as the portfolio turned over nearly twice a year.

Behind StockScouter is Camelback Research Alliance, a Scottsdale (Ariz.) investment boutique. The firm got its start analyzing data on trading by corporate insiders, one of four areas scanned by StockScouter. The others are fundamentals, such as estimated profit growth; valuations, such as price-sales ratios; and such technical indicators as relative price strength. In all, Camelback looks at 10 factors after each trading day to rate 6,500 U.S. stocks by the next morning for their potential return, adjusted for risk.

If this were a winning Powerball ticket, Camelback would not sell it to Microsoft--and Microsoft would not give it away at MSN. And just because the model would have clicked in the 1990s doesn't mean it will now. Langdon Wheeler, president of Numeric Investors, a pioneer in quantitative stock-picking models, also warned me: "I would be cautious about using this to go cherry-picking one or two stocks."

Just the same, StockScouter analyzes far more data than most people can hope to for six stocks, let alone 6,500. It yields daily lists of top-rated stocks, both overall and in subsets (table). Best of all are the details given in its reports on each stock--good food for thought as you give your portfolio a checkup or research new stocks.

Take Krispy Kreme Doughnuts (KKD ), a stock I consider curiously overpriced. StockScouter rates it an 8. I find one possible explanation: Institutions have been accumulating the stock. Similarly, I've noticed JDS Uniphase (JDSU ) trading lately below $7. A bargain? Not to StockScouter, which gives it a 4, partly because analysts are cutting profit estimates.

StockScouter's opinion on these stocks did not necessarily change mine, not least because it's focused on a relatively near, six-month horizon. But the best investors not only consider but actively seek out evidence that's potentially contrary to their hypotheses. StockScouter is an objective, fast, and free way to do just that.

By Robert Barker

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