Note: Unless otherwise specified, currency amounts described in this article are in U.S. dollars, and government references are to the U.S. government.
Jeffrey P. Ryan
CFA, Senior Equity Researcher, Schwab Equity Ratings®, Schwab Center for Financial Research January 26, 2010
Key points
Finding the right stock to buy can sometimes seem overwhelming.
We'll show you how Schwab Stock Lists can help you narrow down the stock universe to generate buy ideas to help you maintain a diversified portfolio.
Helpful information for stock traders.
"How do I get started?" "Which stocks should I consider first?" These are questions I often hear from Schwab clients who want to invest in individual stocks. Certainly, the choice of stocks for your portfolio can look intimidating, even with the help of Schwab Equity Ratings and its "buy stocks rated A or high B" guidance. So we've also developed a source of ideas to help new and experienced investors alike—Schwab Stock Lists™.
Schwab Stock Lists can help make researching your stock ideas easier by:
Generating buy ideas.
Giving your stock research efforts a head start in the effort to find potential winners.
Helping maintain your portfolio's diversification.
Saving you time in managing your portfolio.
Let's find out how.
What are the types of Stock Lists?
To get started using the Stock Lists, it's important to know what they are. There are 15 Schwab Stock Lists based on Schwab Equity Ratings:
Ten Sector lists, which have the five top-rated stocks from each of the stock market's 10 economic sectors (such as consumer staples, industrials, health care, and so forth).
Four Style lists—large-cap value, large-cap growth, small-cap value and small-cap growth—which contain the 10 top-rated stocks in each style category.
The Schwab Composite Stock List, which contains the three top-rated stocks from each sector list.
How do stocks make it on to the Stock Lists?
To be included on a Stock List:
A stock's Schwab Equity Rating must be B or better.
Stocks with market capitalizations below $250 million and those priced under $5 or over $300 are excluded. This tends to eliminate stocks that are relatively difficult to trade.
Our Large-Cap Growth and Large-Cap Value lists are drawn from the 250 largest stocks, by market cap, that meet the criteria above.
To determine which stocks are considered for the "Growth" and "Value" style lists, the stock lists draw from a combination of Price/Earnings and Price/Book Value ratios.
How should I use the Stock Lists?
The first step in using the Stock Lists is to keep in mind our guidance about maintaining a well-diversified portfolio—generally hold 40 or more stocks from different economic sectors and capitalization categories.
Diversifying across sectors and capitalization categories is a vitally important step in controlling the overall risk of your portfolio. Although, diversification strategies do not assure a profit or protect against losses in declining markets, they can help to reduce the chance of being overexposed to underperforming sectors or to periods when large or small stocks underperform.
Here's a step-by-step guide of how the Schwab Stock Lists can help you diversify by sector and market capitalization and find new style and sector buy candidates.
Determine your benchmark weights. First, go to Schwab Sector Views and print the page. Schwab Sector Views provides the "benchmark weights" of each sector within two well-known stock indexes (the Standard & Poor's 500® index and the Dow Jones Wilshire 5000® Total Stock Market index). Your initial objective should be to buy stocks from each sector to match, as a percentage of your total number of stocks, the benchmark weights shown. For example, if the industrial sector's benchmark weight is 10%, then four of the stocks in a 40-stock portfolio should be industrials. Since the benchmark weights aren't dramatically different between these two capitalization-weighted indexes, you can select your weights from either index.
Diversify by sector and market capitalization. Sector and market cap diversification are, we believe, the most important risk-control steps you can take within your portfolio—and generally the easiest to implement. The Schwab Composite Stock List is a great place to start, since it contains the three best-rated stocks from each sector. Sort the list by sector by clicking on the column header, which makes it easy to find the stocks for each sector. Consider the A- and B-rated stocks in each sector as potential buy ideas. Within each sector, look in the Market Cap column for at least one large-cap and one small-cap stock. The individual Sector lists each contain five stocks; consider them if you need additional ideas. Once you're armed with buy ideas, you should follow the steps in our recommended research process.
Finding style stocks. There are no generally accepted definitions for characterizing stocks as "value" or "growth." And it's extremely difficult to predict which style will outperform in the future. But for investors who want exposure to one style or the other, Schwab provides four Style lists: Large-Cap Growth, Large-Cap Value, Small-Cap Growth and Small-Cap Value.
Tilt if you're so inclined. Just as it's difficult to predict which style will outperform, it's also difficult to predict sector performance. Our core recommendation, therefore, is to invest on a sector-neutral basis. "Tilting" means overweighting your portfolio in favor of one or more sectors or a market capitalization category (and, by implication, underweighting it in others), based on a forecast of the future performance of that sector or market cap group. Schwab Sector Views, described above, represent our intermediate-term outlook for various sectors, or you may have your own viewpoint. If you wish to adopt a sector or capitalization tilt, use the Composite, Sector or Style lists to find buy ideas.
Manage your portfolio. We suggest that you check the Schwab Equity Ratings of your portfolio's stocks each week. If an analysis of your portfolio suggests that you should sell one or more stocks, or that you're overweight or underweight in one or more sectors, you can use the Composite List and the sector lists as a source for buy ideas.
We created these lists because we believe that a key aspect of investment success is creating and maintaining a diversified portfolio. Diversification across sectors and capitalization groups are vital parts of this effort, and our Stock Lists can make this goal much easier to attain.
Important Disclosures
Schwab Equity Ratings use a scale of A, B, C, D and F, and are assigned to approximately 3,000 stocks headquartered in the United States and certain foreign nations where companies typically locate or incorporate for operational or tax reasons. Schwab's outlook is that A-rated stocks, on average, will strongly outperform, and F-rated stocks, on average, will strongly underperform the equities market during the next 12 months. Schwab Equity Ratings and the general buy/hold/sell guidance are not personal recommendations for any particular investor or client and do not take into account the financial, investment or other objectives or needs of, and may not be suitable for, any particular investor or client. Investors and clients should consider Schwab Equity Ratings as only a single factor in making their investment decision while taking into account the current market environment.
The information provided is for general informational purposes only and should not be considered as an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Diversification strategies do not assure a profit and do not protect against losses in declining markets. Past performance is no guarantee of future results.
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