NEW YORK (CBS.MW) – Charles Schwab Corp Schwab said Monday its stock rating system has outperformed the overall market in the year since its unveiling, and launched a Web site that allows the public to track the results for themselves.
Such data has mostly been unavailable in the brokerage industry in the past, since investment banks and analysts that work for them don’t generally give out report cards on how stocks perform after they receive ratings.
ratings deploy a system of A, B, C, D and F, with A corresponding to “strong buy” and F a “sell.”
While Schwab’s “A” and “B” stocks outperformed the broad market, they did post overall losses.
From May 6, 2002 to May 5, 2003, the average performance of Schwab’s A-rated stocks – about 350 names – was down by 5.93 percent vs. a 10.48 percent drop in the Wilshire 5000 Index
The average performance of the all of the roughly 3,500 equities rated by Schwab was down by 13.48 percent. The “F” rated stocks fell about 30.8 percent.
“Investors want credible research to help them feel confident about their investment decisions,” said Jerry Chafkin, executive vice president, investment advice and products. “Schwab equity ratings are not influenced by investment banking interests, or analyst emotion.”
Schwab’s equity rating system comes in the wake of years of investor apathy in the face of the bear market.
The broker set up its own stock rating system even as traditional banks came under scrutiny for conflict of interest by using analyst ratings to win business instead of focusing on individual investors.
Now, with the $1.4 billion global settlement with investment banks, more forms of independent research will be included, although some of the details are still being worked out.
Chafkin acknowledged that other analyst rating report cards may be surfacing in the future, but added that Schwab is attempting to be at the “leading edge” of the movement.
Even with the Wall Street settlement behind them, only about 10 percent of stocks covered by Wall Street carry a “sell” rating vs. a 30 percent share by Schwab’s stock coverage.
Schwab Vice President Greg Forsythe, the originator of the equity ranking systems, said the ratings are updated every Monday morning amid constant scouring of company data such as free cash flow strength, operating efficiency, earnings quality, and overall stock price.
Stocks are graded on fundamentals, valuation, momentum and risk, all of which weigh into the overall rating.
“The focus is on the stock – is this stock potentially mispriced,” he said.
That approach differs from investment banks, which rate stocks largely on future earnings per share performance.
Liz Ann Sonders, chief investment strategist, said she uses the Schwab ratings in her day-to-day decision making processes.
Recently, she came up with a list of companies with high free cash flow to gauge firms in a position to pay dividends.
Dividends have been a focus on Wall Street as Congress mulls income tax cuts on payouts from company profits.
Schwab also offers the Schwab Hedged Equity Fund
and the Schwab Core Equity Fund
as mutual funds based on its stock ratings.
Schwab said performance data is available by clicking on “Markets & Research,” then “Schwab Equity Ratings” off its Web site.
A survey sponsored by Schwab and conducted by a non-affiliated firm, Opinion Research Corporation, found that 76 percent of those surveyed said that research conducted by independent research firms, that are not financially tied to the companies they evaluate, is more valuable than research conducted by Wall Street firms that are financially tied to the companies they evaluate.
Additionally, 66 percent said they would like to know how well stock analysts’ recommendations compare to subsequent stock performance.
View more information: https://www.marketwatch.com/story/schwab-touts-performance-of-year-old-stock-rating-system