Raymond James Wins Top Spot in Broker Picks

IS THERE SOMETHING unusual in the drinking water around Tampa Bay, Fla., these days? What else can explain the surprising first-place performances so far this year of both the once-woeful Tampa Bay Rays baseball team and Raymond James Financial (RJF)? The broker, headquartered in the bay-side city of St. Petersburg, has likewise put its poor record behind it, with a top showing in Barron's most recent ranking of brokers' stock recommendations.

Barron's every half-year vets the stock picks of some important U.S. brokerages for the astuteness of their buying advice. The rankings include giants that most investors would recognize, like Morgan Stanley (MS), as well as the less well known, like little Matrix USA.

Our final roster is based on data compiled by Zacks Investment Research, a Chicago-based independent outfit that analyzes brokers' research and keeps a running tally of their focus lists, or best stock ideas, for various periods over the past five years. (For more on the methodology, please see "Behind the Lists" at the end of this article.)

Raymond James has had its share of bad finishes in our rankings over the past three years. Yet in the latest competition, its focus list posted an uncommon double win, taking first place in the January-June 2008 period, as well as in the 12 months ended June 30.

This contest marks the second in a row with a poorly acting and volatile stock market as a backdrop. In these battles for Wall Street's bragging rights, the highest finishes are always backed by savvy stock picks, but the most common thread has been the avoidance of sectors and stocks that suffered huge collapses. That's particularly important with a relatively small focus list of 20 names or less, as some of our contestants have.

In the battle for the January-June crown, this meant avoiding financial stocks — no surprise — and consumer-related picks. In both the six- and 12- month periods, brokers that kept natural-resource stocks, particularly energy sectors, on their focus lists, enjoyed a neat boost.

All that might be reversed in the next ranking, given the market's recent sector flip-flop. But in the contest at hand, oil explorers, natural-gas companies and sundry other energy stocks ruled. A supporting role was played by small-cap stocks, which began to outstrip large-caps toward the end of the period.

Matrix took the gold in the three-year contest with returns of 51.72%, moving up from second place last time. Indeed, Matrix improved its position in all ranked periods. Meanwhile, perennial powerhouse Goldman Sachs (GS) again won the five-year match going away, and took silver in the three-year (see nearby table, "A Very Tough League"). Charles Schwab (SCHW), alone among our contestants with a solely quantitative stock-picking method and with the largest focus list — 100 names, had a middling short-term return, but finished second in the five-year period and first in the seven-year race (not shown).

Not only did Raymond James' strategy handily outperform the market's 12% drop in the difficult six-month period, it alone had a positive return, up 0.27%. Chief investment officer David Henwood, who by the way is a Rays fan and has season tickets, explains: "We avoided some bad areas, like financials, real estate and consumer goods in the last half of 2007 and first half of this year."

The way financial stocks were tattooed, that alone might have been good enough for a win, but Raymond James' portfolio was also turbocharged by being overweight during most of the period in energy, with picks like Continental Resources (CLR), which jumped about 165% in the period. (Continental is now off the list on profit-taking, and the energy weighting was reduced in April-June to one stock from six.) In a focus list of only 15 to 25 names, a pick like Continental generates plenty of torque. Henwood adds that some methodology changes made in 2007, like automatically dropping stocks that fall 15% from the entry price, have helped address a previous tendency to cling to laggards too long.Lately, Henwood has added Pharmaceutical Product Development (PPDI), an outsourcing company that helps drug companies put together clinical trials for product testing. (PPDI was the subject of a favorable Aug. 12 article in Barron's Online.) He also likes Walter Industries (WLT), a coal miner. Henwood, who isn't buying the dips in financial stocks, "hopes" that the housing market stabilizes by mid-2009.

Morgan Keegan, which, like Raymond James, follows small- and mid-size stocks, came storming back to grab the No. 2 spot in the six-month period. In our previous contest, the Memphis-based regional broker, a unit of Regions Financial (RF), uncharacteristically had finished last.

"I'll be back!" vowed Morgan Keegan's Elkan Scheidt, chairman of the focus-list committee, in our last contest — and he made good on that promise. The broker lost a painful 17% in 2007's second half, but has rebounded notably, to an almost flat performance in this year's tumultuous first half. Morgan Keegan's 15-to-20-name list benefited from energy issues — the weighting has since been reduced — plus rail stocks and merger activity.

Morgan recently added Kirby (KEX), a barge operator whose stock is down 25% on recent Midwest river-flood damage. "But it's a case of the baby being thrown out with the bath water, as Kirby operates well south of the problem areas," Scheidt adds. Morgan Keegan took third place in our three-year assessment.

Our three-year winner, Matrix, uses a quantitative method, as does Schwab, but combines it with a traditional analyst approach. An investment committee sets sector themes, and then Matrix applies a quant approach that cuts a 3,000-stock universe to about 200 by scoring for economic value added, or EVA. This is measured by the growth in the spread between a company's return on capital and its cost of capital. On those 200 stocks, Matrix then employs a fundamental approach to whittle the list to between 15 and 25 names.

Matrix CEO Mike Blaustein says "ConocoPhillips was an important part of our three-year performance, as was Apple." ConocoPhillips (COP) remains on the list, but Apple (AAPL) is off. "The U.S. economy is going through a marinating process and [is] not yet ready to start cooking," says the CEO. So Matrix has been adding "value stocks with stable cash flows and a potential catalyst," like Time Warner (TWX) and Nasdaq OMX Group (NDAQ).