The Zig -- or Zag? -- Portfolio
By Michael Kaye, CFA
Like members of most professions, equity analysts can have widely diverging views on the same subject -- for example, the investment merits of a particular stock. Of course, at Standard & Poor's, we have our own team of 47 equity analysts following a total of 1,169 stocks -- and, naturally, their opinions on some issues can differ from the "conventional wisdom" of the rest of Wall Street.
We thought it would be interesting, then, to find out exactly where our analysts zig when the Street zags. We started with the stocks that carry the highest investment ranking in Standard & Poor's Stock Appreciation Ranking System (STARS), a qualitative system based on fundamental research conducted by S&P's own analysts. Stocks ranked 5 STARS (buy) are expected by S&P analysts to outperform the broader market over the next 6 to 12 months.
The portfolio of S&P 5-STARS stocks has had a pretty impressive track record over the years. Since the inception of the STARS system December 31, 1986, through August 29, 2003, the 5-STARS have posted an annualized total return of 16.0%.
From the 5-STARS list, we screened for those names carrying significantly lower opinions from other investment research outfits. Based on data from research provider I/B/E/S, they had to carry an average opinion from the rest of Wall Street equivalent to, or lower than, S&P's 2-STARS, or avoid, ranking. That indicates that analysts expect a stock to underperform the overall market over the next 6 to 12 months. Each stock had to be covered by at least five outside analysts.
Of course, differences in stock ratings may not arise from disagreement on the prospects for the company's business -- or its future viability -- but rather, the stock's valuation. Those analysts who assign lower rankings may believe that the stock in question has little room for further price appreciation.
Our search turned up a dozen names:
Kaye is a portfolio services analyst for Standard & Poor's