Help for Investors in Need of Objective Advice

By JOSH FRIEDMAN

Aug. 14, 2001 12 AM PT

TIMES STAFF WRITER

Investors who are tired of what critics call Wall Street brokerages’ perpetually sunny and potentially compromised stock research can find other sources for information, experts say.

“Independent research is something you almost have to look at,” said Ken Janke, president of the National Assn. of Investors Corp., a Royal Oak, Mich., firm that provides information services to investment clubs and individuals. “It’s a hot issue now, but this has always been the case.”

Brokerage analysts have drawn fire for their continued bullishness over the last year even as many stocks have collapsed. Critics, including some in Congress, say analysts have faced increasingly severe conflicts of interest: Although clients want objective advice, analysts have been reluctant to suggest selling stocks for fear of costing their brokerages lucrative investment banking business, critics say.

Major brokerages have announced steps in recent months to reduce the potential for analyst conflicts of interest, but many experts say serious investors should consider independent stock research as a supplement to what they find on Wall Street.

Value Line Inc. and Standard & Poor’s Corp., which use two different methods of rating stocks, are probably the most popular independent research sources among the NAIC’s 34,000-member investment clubs, Janke said.

Individual company Web sites and brokerages that don’t have significant investment banking businesses also can be useful sources, experts say.

Here’s a closer look at some sources investors can turn to:

* Value Line Investment Survey. The weekly Value Line survey is best known for its “timeliness” ranking system, which rates 1,700 stocks based on expected performance over the next six to 12 months.

Since the system was introduced in 1965, stocks rated “1,” or best, for timeliness consistently have beaten the broad market as a group, based on one-year holding periods, Value Line said. Stocks rated “5,” or worst, have generally been laggards.

Fans say the beauty of the system is that it is mechanical, based on a number-crunching computer model. There are no individual analysts making judgment calls about the stocks.

A way to get the most from Value Line’s system is to buy and hold for one year a mix of at least eight stocks that are rated “1” for timeliness and that also get a “1” technical ranking, said Harvey Katz, Value Line’s managing editor in New York.

Value Line’s timeliness rankings are based on a proprietary formula that emphasizes a company’s earnings momentum, while the technical rankings stress near-term share price momentum, he said.

Value Line’s individual stock reports aren’t as hefty as most brokerage reports, but each one-page summary, updated quarterly, includes fundamental data and brief commentary by the firm’s analysts.

An Investment Survey subscription costs $570 a year, but it is available at most large libraries.

* Standard & Poor’s Corp. For his own investing, NAIC’s Janke likes to read what both Value Line and S&P; have to say about any stock. Whereas Value Line takes pride in its mechanics, S&P; analysts use their judgment to determine the firm’s proprietary star ratings for stocks.

S&P; is a division of publisher McGraw-Hill Cos. and makes its money selling research. The firm is not a brokerage.

“Our individual analysts look at a lot of data, of course, but they can upgrade or downgrade a stock as they see fit,” said Bob Gold, S&P;’s chief health-care and consumer goods analyst in New York.

S&P;’s weekly Outlook newsletter highlights investment ideas and lists changes in the firm’s star ratings (here, 5 is best and 1 is worst).

As a group, S&P;’s 5-star stocks have soundly beaten the market since the system’s inception in 1987, the firm said. Last year, those picks rose an average of 6.4% versus a price drop of 10.1% for the blue-chip S&P; 500 index.

S&P; publishes individual reports on about 5,000 stocks, 1,100 of which are included in the star ranking system.

The Outlook newsletter costs $298 a year. A subscription to S&P;’s individual stock reports costs about $1,000. S&P; publications also are available at many libraries.

Customers at brokerages, including Charles Schwab, E-Trade and Merrill Lynch, can get S&P;’s research, though in some cases there may be a fee.

* Morningstar.com and other Web sites. Though better known for its mutual fund research, independent research firm Morningstar Inc. in Chicago also covers about 1,000 stocks, about 500 of which are included in the firm’s new stock star ratings.

Unlike Morningstar’s fund ratings, which strictly measure past performance, the stock ratings are meant to project performance.

Morningstar’s stock ratings--which emphasize the firm’s estimate of the discount or premium of a company’s share price to its intrinsic value--are aimed at bargain hunters and investors with a three-to five-year horizon, said Pat Dorsey, the firm’s director of stock analysis.

S&P; and Value Line ratings, in contrast, are meant more as six- to 12-month forecasts.

Because Morningstar only introduced its stock star ratings Wednesday, a big difference between them and the S&P; and Value Line products is the lack of a track record.

Morningstar’s premium service ($99 a year) gives users access to all its stock reports, but the firm also posts a few free ones as “teasers” on its home page (https://www.morningstar.com) each day, Dorsey said.

Another popular Web site, Microsoft Corp.’s MSN MoneyCentral (https://www.moneycentral.com) launched its StockScouter service in June. Like Value Line, it’s designed as an objective rating formula based on a proprietary computer model.

But, like Morningstar’s service, StockScouter is new and untested, though MoneyCentral columnist Jon Markman said the formula scored big in 10 years of back-testing.

StockScouter, available free online, assigns stocks a 1 to 10 rating (10 is best) based on expected performance over the next six months. It uses earnings momentum and other criteria.

* Other ideas. Investors looking for free stock picks from various “experts” might want to check out Validea.com (https://www.validea.com), which scans more than 30 print publications, Web sites and broadcast outlets, ranking individuals and organizations based on their stock-picking performance over various time spans. Recent stock selections from top-rated analysts and media outlets are highlighted.

Janke says individual companies’ Web sites are the best online sources for investors’ information. “Investors can learn an awful lot by thoroughly reading through all the recent financial statements and news releases,” he said.

Also, some brokerages, such as Edward Jones, A.G. Edwards and Prudential Securities, proudly note that investment banking is only a minor revenue source for them, which they argue minimizes potential conflicts of interest.

What’s more, research from any Wall Street brokerage can be useful, experts say. They advise ignoring the ultimate “buy,” “hold” or “sell” recommendations and focusing on hard data.

“The analysts’ numbers are basically good--it’s their conclusions that are a problem,” Janke said. “You can use the brokerage reports, you just have to do your own analysis.”

Josh Friedman can be reached at josh.friedman@latimes.com.

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Independent Stock Research Sources

Investors who wish to steer clear of Wall Street brokerages can find stock research and recommendations from various other sources. Here are a few of the independent sources offering stock analysis in their newsletters and on their Web sites:

Service Sampling of current top-rated stocks

Value Line Abercrombie & Fitch (ANF),

(800) 833-0046 American Woodmark (AMWD),

www.valueline.com Aviall (AVL), Copart (CPRT), Pep Boys (PBY)

$570/year

Standard & Poor’s ExxonMobil (XOM), Kaydon

(800) 852-1641 (KDN), Linens ‘N Things (LIN),

www.standardandpoors.com MBNA (MBNA), Pepsico (PEP)

$298/year (S&P; Outlook)

Morningstar Apple Computer (AAPL), EMC

www.morningstar.com (EMC), Philip Morris (MO), Toys

$99/year (premium access) R Us (TOY), Waste Management (WMI)