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Today's Strong Sells

By Bill Barker - Updated Nov 11, 2016 at 3:51PM

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The biggest recommendation out there deserves the biggest sell rating.

There need to be more "sell" and "strong sell" ratings on stocks for the ratings to have any meaning. For the most part, if you look over how the Wall Street analyst community rates stocks, the ratings completely inhabit the narrow range of "neutral" to "strong buy."

Yet there are so many areas where a good "strong sell" rating would help investors immensely. The kind of help that might put, oh, about $40 billion or more annually into the pockets of investors.

Here's an example of a much-needed "strong sell" rating. There's a new study out (link opens a PDF) titled "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry." It's the most detailed work ever conducted comparing the record of financial advisors to those who make their own mutual fund purchases.

Here are the results for returns from 1996 through 2002:

 Category

 Returns

Financial advisors:

2.9%

Individual investors:

6.6%

*Raw returns, net of all expenses. Includes bond and equity funds.

The study measured the results of literally trillions of dollars of mutual fund purchases, including the best-known and most trusted names in the industry. The study demonstrates that Wall Street's brokers don't find better-performing funds than individuals, don't allocate assets among different asset classes better than individuals, and don't display fewer biases toward the "hot" stock than individuals.

Every honest financial advisor needs to start issuing a "strong sell" rating to the world of managed mutual funds. But don't expect that to happen anytime soon -- not with $40 billion (yes, that's billion) going to brokers and mutual fund managers every year from sales fees and management costs.

Where's the strong buy?
To the extent that mutual funds have any true benefits, they can provide investors with a diversified portfolio. But you can create that diversification directly by owning the same stocks that mutual funds own, at a fraction of the annual cost.

To begin to get the right diversification, become aware of the major divisions of stocks, as defined by the Global Industry Classification Standards (GICS):

  • Energy
  • Materials
  • Industrials
  • Consumer discretionary
  • Consumer staples
  • Health care
  • Financials
  • Information technology
  • Telecommunication services
  • Utilities

A portfolio with the greatest possible diversification benefits can be built by owning about two companies from each of these classifications. Here's an example. I've selected companies with low-ish price-to-earnings (P/E) ratios and high-ish returns on equity (ROE) relative to the industry averages. That combination of factors has historically produced better-than-average returns:

GICS

Company

P/E

ROE

Energy

Apache (NYSE:APA)

5

28%

Materials

Landec

14

12%

Industrials

Stanley Works (NYSE:SWK)

7

18%

Consumer discretionary

Fossil (NASDAQ:FOSL)

7

20%

Consumer staples

Unilever (NYSE:UN)

11

36%

Health care

CIGNA (NYSE:CI)

5

17%

Financials

Franklin Resources (NYSE:BEN)

9

22%

Information technology

Seagate Technology (NYSE:STX)

3

20%

Telecom

AmericaMovil

13

44%

Utilities

Energen

7

22%

Data from Capital IQ, a division of Standard & Poor's.

There's a lot more to learn about companies than their P/Es and ROEs. A more in-depth understanding of companies will give you a chance to not only equal the market's returns (which you have virtually no chance of doing with managed mutual funds), but also surpass them. At Motley Fool Stock Advisor, we have a five-year track record of beating the market with our recommendations; more important, we educate our members about how to do so on their own. If you'd like to try out the service with a totally free 30-day pass, be our guest.

This article was originally published Feb. 2, 2007. It has been updated.

Bill Barker owns no shares of any company mentioned. Unilever is a Motley Fool Income Investor recommendation. Landec and Fossil are Motley Fool Hidden Gems selections. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Seagate Technology plc Stock Quote
Seagate Technology plc
STX
Apache Corporation Stock Quote
Apache Corporation
APA
$34.84 (4.88%) $1.62
Cigna Corporation Stock Quote
Cigna Corporation
CI
Fossil Group, Inc. Stock Quote
Fossil Group, Inc.
FOSL
$6.17 (-6.51%) $0.43
Stanley Black & Decker, Inc. Stock Quote
Stanley Black & Decker, Inc.
SWK
$98.30 (3.55%) $3.37
Unilever N.V. Stock Quote
Unilever N.V.
UN
Franklin Resources, Inc. Stock Quote
Franklin Resources, Inc.
BEN
$28.67 (0.99%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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