Friday, February 03, 2006

Below Average and Incomplete
Charles Schwab weighs in on your Cheap Stocks Editor’s Portfolio

As some of you may know, a few years ago, Charles Schwab developed a rating system for stocks, appropriately dubbed “Schwab Equity Rating”, which grades stocks as A, B, C, D, F, or NC (not covered). I’ve had a Schwab account for years- its where my stock portfolio resides, and I’ve been very happy with their service, and declining commission structure. There are cheaper discount brokers out there, but I’m sticking with Schwab.

So, it was quite interesting the other day when I viewed my portfolio holdings on a page that also displays Schwab’s rating for each stock. Boy was I in for a surprise. If I were to view each of the ratings as a “grade” reflecting my investment prowess, I am sadly below average. In fact, for the 18 “classes”, I received 2 B’s, 2 C’s, 5 D’s, and 9 “Not Covereds”, or as I view it, “Incomplete”. That averages out to a C-, or even D+!

I didn’t take I personally. My investment style is somewhat off the beaten path, and although there are some household names in the portfolio, many others, such as those we typically profile on this site, just are not on anyone’s radar. But therein lies the beauty. Some companies fall off the radar because they are either too small for the Street to care about, or they just fall out of favor, and languish with little or no coverage. That’s where we come in (We, meaning deep value investors). We have the ability to identify, and analyze these companies, and discover an interesting and potentially profitable story, that no one else has even cared to investigate.

Sure there are pitfalls…you need to be able to distinguish a diamond in the rough from a cigar butt, and that only comes with experience. Some bad experiences, no doubt. How do you know your analysis is accurate, especially given situations where there is little disclosure? You don’t always know, and you need to be careful. Furthermore, you should not concentrate too much of your money in any single name.

In any event, today, your Cheap Stocks editor bares his soul, revealing his report card. (NC=not covered, stocks in bold have been mentioned in previous Cheap Stocks)

Abbot Labs (ABT): C
Avoca Inc (AVOA): NC
BHP Billiton (BHP): NC
JG Boswell (BWEL): NC
Gallery of History (HIST): NC
Maui Land and Pineapple (MLP): C
McDonald’s (MCD): B
Merck (MRK): B
Northern Orion Resources (NTO): NC
PICO Holdings (PICO): NC
Plum Creek Timber (PCL): NC
Southwest Water (SWWC): D
St. Joes (JOE): D
Tejon Ranch (TRC): D
Tempur Pedic Intl (TPX): D
Tootsie Roll (TR): D
Vermont Pure Holdings (VPS): NC
Zapata (ZAP): NC

*The author has a position in all stocks mentioned in this report. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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