Markets & Finance

The Zig -- or Zag? -- Portfolio, Part 2


By Michael Kaye, CFA In our last screen, we sorted for those companies with S&P's top investment ranking of 5 STARS (buy) but that carried significantly lower opinions, on average, from other investment research outfits. This week, we'll examine the flip side: Stocks with S&P's lowest investment opinion that feature a higher average rating from the rest of Wall Street.

We started with the stocks that carry the lowest 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 1 STARS (sell) are expected by S&P analysts to underperform the broader market over the next 6 to 12 months.

REASONABLE DIFFERENCES.The 1-STARS designation has been a good predictor of underperformance over the years. Since its inception December 31, 1986, through August 29, 2003, the S&P 1-STARS portfolio has posted a cumulative decline of 23.46%, while the S&P 500-stock index has gained 316.25%.

From the 1-STARS list, we sifted for those names carrying significantly higher 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 higher than, S&P's 4-STARS, or accumulate, ranking. That indicates that analysts expect a stock to outperform 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 higher rankings may believe that the stock in question has greater room for further price appreciation.

Our search turned up 11 names:

On the contrary: 1-STARS stocks with higher ratings from the Street

Company/ticker

S&P STARS Rank

Cablevision (CVC)

1

Coinstar (CSTR)

1

Cummins (CUM)

1

Danaher (DHR)

1

Frontline (FRO)

1

Georgia Gulf (GGC)

1

ICU Medical (ICUI)

1

Lockheed Martin (LMT)

1

Murphy Oil (MUR)

1

Navistar (NAV)

1

Northrop Grumman (NOC)

1

Kaye is a portfolio services analyst for Standard & Poor's


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