Dow Jones Newswires
Broker-Recommended Stocks Trailed S&P 500 Index

By Dinah Wisenberg Brin

PHILADELPHIA -- Stocks recommended by U.S. brokerage firms over the past decade slightly underperformed the Standard & Poor's 500 on average and showed more volatility than the overall market, but some firms' picks outperformed the index, according to a Penn State University professor's study.

Stocks recommended by top-tier firms fell short of the S&P 500 and were a bit more volatile, while those picked by mid-tier and regional firms outpaced the index and were slightly less risky, according to the study by a finance professor at the university's Smeal College of Business.

Merrill Lynch's picks did best among those of the top-tier brokerage houses with data for all 10 years, while Raymond James' recommendations led the mid-tier regional firms, according to the study, which has been accepted for publication in the Journal of Investing.

On a risk-adjusted basis, Merrill did the best of all firms, since its picks were less risky, according to the study's author, Penn State finance professor J. Randall Woolridge.

"There's a huge differential between firms and I didn't expect to find that," Woolridge said in a telephone interview Tuesday with Dow Jones Newswires.

Woolridge found that the average compounded quarterly return for stocks recommended by large and mid-tier firms from 1993 to 2002 was 2.17%, compared with 2.26% for the S&P 500. He based the analysis on data from a quarterly survey prepared by Zacks Investment Research and published in the Wall Street Journal.

For six top-tier firms with data for the entire 10 years, the quarterly recommended-stock returns averaged 1.99%, with results ranging from a low of 1% for Lehman Brothers picks to a high of 3.07% for Merrill Lynch, the study found. The average return for stocks recommended by four mid-tier firms with data for the whole 10 years was 2.52%, with Raymond James performing the best, delivering an average compounded quarterly return of 3.33%.

"The results of this study indicate that an investor following the stock recommendations of brokerage firms, on average, does no better than the overall market," Woolridge said in a university release.

On a risk-adjusted basis, only three of the 10 firms with a full decade of data - Merrill Lynch, Raymond James and Bear Stearns - outperformed the S&P 500, with Merrill the clear winner in terms of statistical significance.

A $1,000 investment in Merrill's picks grew to $3,345.92 over the decade, while a similar investment in the S&P 500 grew to $2,433.46, the study found; stocks recommended by Merrill provided the highest compounded quarterly return and lowest risk, the study said.

Raymond James' raw return was higher but less statistically significant than Merrill's, since Raymond James' recommended stocks were riskier, Woolridge said. He noted that Raymond James focuses on smaller-cap stocks.

While Merrill picks achieved average quarterly returns of 3.07%, Raymond James' returned 3.33% and Lehman Brothers' averaged 1%, Bear Stearns' stock picks averaged 2.8%, Credit Suisse First Boston picks averaged 2.41%, Goldman Sachs' 1.93%, Morgan Stanley's 1.86% and Smith Barney's 1.11%, the study said.

Credit Suisse outperformed the S&P 500 in terms of raw returns, but didn't beat the market on a risk-adjusted basis, since it focused on higher-risk stocks, Woolridge said.

A.G. Edwards picks achieved an average quarterly return of 2.06%, and Prudential Securities' recommendations returned 1.55%, the study said.

Woolridge said he isn't affiliated with any of the brokerage firms.

Copyright 2003 Dow Jones Newswires

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REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu .

Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

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