L.A. companies are popular on analysts' 'beauty' lists for 2003. (Up Front).

A year ago at this time, Standard & Poor's analysts placed IndyMac Bancorp on the research firm's PowerPicks 2002 list of companies that could outperform the broader stock market, citing the Pasadena-based mortgage lender's rising market share in a fragmented industry.

As it turned out, the stock lost 21 percent of its value, despite a refinance boom, because of investor concerns that the results wouldn't hold up indefinitely. Meanwhile, cross-town rival Countrywide Financial Corp. rose 27 percent.

This year, IndyMac is on the list again -- "attractively valued," according to S&P.

"Ultimately, public companies are going to trade off their fundamentals," said Mike Perry, IndyMac's chief executive, who expressed surprise at the company again being selected for S&P's list -- despite his confidence that cost cutting and rising market share will preserve profits. "I'm hoping that they're right this time," he said.

IndyMac is among a handful of L.A.-area companies gathering attention from stock pickers at major national research firms who use the lists to market their stock picks to institutional and retail customers. Companies that make the lists welcome the notoriety.

But even as Wall Street strives to restore investor confidence, the lists can be a misleading indicator because they often highlight companies with which the brokerage firms have investment banking ties (or would like to).

Salomon Smith Barney, for example, recommends two locally based companies in its 2003 equity market outlook. One of the companies, Northrop Grumman Corp., is an investment banking client. Salomon plans to seek investment banking business with the other, WellPoint Health Networks Inc.

"These are popularity contests, and beauty contests," said an official with one large Southern California firm whose name wound up on some negative lists this year after its stock dropped sharply during fall. "What really matters is performance."

Differing methods

Along with S&P, brokerage firms like Lehman Bros., Salomon and Thomas Weisel Partners set out lists of "best ideas" each year that go beyond the typical "buy, sell, hold" ratings by hand-selecting a model portfolio for the firm's clients.

(S&P isn't affiliated with any brokerage, although it's been criticized for selecting fast-growing companies on its widely benchmarked S&P 500 index, rather than steadier-performing large companies.)

Some of the lists, such as Salomon's, are put together through an industry-by-industry analysis led by a top strategist or stock-picker. They tend to wind up with more company picks in sectors that the firm's analysts favor. Other lists are derived through a catchall approach. S&P, for example, culls one pick from each of its 40 stock analysts, thereby ensuring all industries are represented.

Critics say that companies winding up on stock pickers' list skew to the larger. That's true in L.A., where this year's picks include Amgen Inc., Avery Dennison Corp., Northrop, Overture Services Inc. and WellPoint.

"I probably share a skepticism of what comes out of brokerage houses," said Mark Hulbert, editor of the Annendale, Va.-based Hulbert Financial Digest, which tracks the performance of newsletter stock pickers. "Even if it's great research, most brokerage firms for a variety of institutional imperatives, do not focus on smaller stocks," as newsletters do, he said.

Some of the lists are reset once a year, such as the S&P list; others have a rotating membership, making it harder to track performance.

S&P's PowerPicks is the only survey that actually publishes its results. It has outperformed the S&P 500 since its inception in 1997, but in last year's bear market, the handpicked stocks fell further than the benchmark index did.

"Anything that brings positive attention is probably good," said John Prosser, senior vice president of finance and administration at Jacobs Engineering Group in Pasadena, another local firm making S&P's list.

S&P noted that Jacobs' "strong bookings from (the) refining market" in the PowerPicks list it published on Dec. 31.

Prosser said that the company, which performs engineering, construction and maintenance services, sees strength in defense and environmental work as well. In the public sector, where government budgets are strained, there's still a lot of work to be had, Prosser said, funded by special bond issues or non-budget trust funds.

Jacobs' stock, recently trading at $38.38 a share, is up 8 percent so far in 2003.

Biotech, defense

Thomas Weisel picked Amgen, the Thousand Oaks-based biotech firm, as one of the 36 stocks to watch this year. After Amgen's stock dipped precipitously in the first half of 2002, then rebounded somewhat to end the year, analyst Patrick Mooney calls Amgen "the premier name in large cap biotech."

He expects the company to enter a period of accelerating revenue and earnings growth in 2003, driven by strong sales growth in its three blockbuster product franchises: Epogen/Aranesp, Neupogen/Neulasta and Enbrel. (Amgen also made the S&P list.)

At Salomon, Northrop and WellPoint made the cut. Salomon's senior U.S. equity strategist, Tobias M. Levkovich, is optimistic about the defense sector and considers Northrop, which has emerged as a leading defense industry player, among the preferred names.

WellPoint is among four health care companies on Salomon's list. Levkovich sees the possibility of tort reform in Washington on issues like medical malpractice insurance, and believes that health care companies could benefit.

Merrill Lynch placed Pasadena-based Avery Dennison, a dominant worldwide player in the pressure-sensitive materials market, on its Focus 1 list, saying that the stock had "defensive characteristics with a good cyclical upside," according to Karen Lane Gilsenan, a Merrill first vice president. Since then, Avery Dennison's stock has risen about 4 percent, to a recent price of $62.65. Merrill adds one stock to its rotating list each month; it doesn't track the results of its picks, a company spokeswoman said.

(Merrill intends to seek investment banking business with Avery Dennison in the near future, according to its research report disclosures.)

Walt Disney Co. didn't make any of the brokerage firm lists located by the Business Journal. But the Burbank entertainment giant was popular among newsletters tracked by Hulbert Financial Digest, which keeps tabs of what scores of independent stock-pickers are saying.

Disney received favorable notices by eight newsletters tracked by Hulbert, and was a favorite among newsletters who beat the market over 1-year and 10-year periods.

KB Home was recommended by seven newsletters, while WellPoint was listed among the least popular local names, with three unfavorable notices.

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Cream of the Crop?

Research firms picked large local names for model portfolios this year.



Company                         Ticker  Research Firm

Amgen Inc.                       AMGN   S&P, Thomas Weisel Partners
Avery Dennison Corp.             AVY    Merrill Lynch
IndyMac Bancorp                  NDE    S&P
Jacobs Engineering Group         JEC    S&P
KB Home                          KBH    Hulbert Financial Digest *
Northrop Grumman Corp.           NOC    Salomon Smith Barney
Overture Services Inc.           OVER   S&P
Walt Disney Co.                  DIS    Hulbert Financial Digest *
WellPoint Health Networks Inc.   WLP    Salomon Smith Barney;
                                        Hulbert Financial Digest *

                                 Stock
                                 Price       YTD
Company                         1/15/03  Performance

Amgen Inc.                      $50.72      +4.9%
Avery Dennison Corp.             60.83       -0.4
IndyMac Bancorp                  19.93       +7.8
Jacobs Engineering Group         38.52       +8.2
KB Home                          44.09       +2.9
Northrop Grumman Corp.           96.80       -0.2
Overture Services Inc.           27.23       -0.3
Walt Disney Co.                  17.99      +10.3
WellPoint Health Networks Inc.
                                 67.71       -4.9

* Hulbert Financial Digest tracks newsletter picks and pans.

Source: Business Journal Research

RELATED ARTICLE: Adored vs. Despised

ANALYSTS, when they run in herds, are rarely correct.

Since 1998. I have performed an annual experiment comparing the performance of the stocks most loved by analysts with those they absolutely hate. My data suggest that you should be skeptical, especially when they are unanimous in their opinions.

The Standard & Poor's 500 Index fell 22 percent last year while the fictional adored portfolio--the four stocks best liked by analysts at the start of the year--fell 23 percent.

That's right, the stocks most revered by Wall Street's stock-pickers fell more than the market as a whole. And 2002 was no fluke. In the five years of my study, the adored portfolio has never beaten the S&P 500.

Analysts' choices were so poor that you might wonder if their despised stocks ever outperform their adored stocks. The answer is yes. In two of the five years they have -- and in one year, 1998, the despised and adored posted identical returns of 11.5 percent.

There's a reason for this counter-intuitive performance of the despised and the adored Stocks deeply out of favor are cheap. They sell for small multiples of earnings, of book value (corporate pet worth) and of sales. It doesn't take much good news--a new top manager or a new product will sometimes do--to raise their price. Stocks that are popular, on the other hand, are expensive Investors expect a steady diet of miracles, and slight earnings disappointments can cause them to tumble.

For stocks to make my adored and despised lists, four or more analysts must rate each of them. I used data from Zacks Investment Research Inc. of Chicago.

The most revered stock atthe turn of last year was Accenture Ltd., the world's largest consulting firm. Known as Andersen Consulting before it was split from Andersen Worldwide in 2000 and went public in 2001, the consultant was rated a "buy" by all 16 analysts who followed it. Accenture, alas, fell 33 percent last year. Shares were affected by an announcement in March that sales growth had slowed to its lowest rate in 13 years. Accenture got off easy compared with its fellow adored stock, Gemstar-TV Guide International Inc. The Pasadena-based publisher of the television magazine and producer of on-screen programming guides saw its shares dive 88 percent last year, oblivious to "buy" recommendations from all 15 analysts following the stock when the year began.

For 2003, analysts adore Pharmaceutical Product Development Inc., American Capital Strategies Ltd., Rugby Tuesday Inc. and General Growth Properties Inc. The new despised portfolio includes UAL Corp., Inrange Technologies Corp., Luminex Corp. and Cornerstone Realty. Each sags under "sell" ratings from at least 80 percent of the analysts who follow the stocks.

If I had to choose between analysts' adored and their despised, I'd go for the latter. Dozens of academic and money management studies have shown that betting on unpopular stocks produces better returns.

And remember that even before this era of skepticism about brokerage firm objectivity, investors often have done better by forming their own conclusions.

John Dorfman, Bloomberg News