News & Our Thinking

If you’re looking for a hot stock pick, throw this page away. It might be dangerous to your wealth.

Today we report our ranking of local companies by performance on measures of profit, revenue and return on equity. We’ve been doing it for 20 years.

So, we thought we’d look back and see how investors might have fared if they had bought stock in some of our winners and then held on for the ride.

The results were mixed. It’s proof of the boilerplate you read on many an investment prospectus: Past performance is no guarantee of future results.

For instance, MEMC won the ranking twice in 2007 and 2008. That was before lean times hit the silicon wafer and solar energy business. If you’d bought when MEMC won in 2007, you’d have lost 96 percent of your money by last week.

Express Scripts won in 2003, 2010 and last year. If you had bought nine years ago, you’d have made a spectacular 521 percent return, compared to a mere 61 percent for the S&P 500 Index of big company stocks.

Then again, if you’d bought in 2010, you’d have made a whopping 3 percent, against 32 percent for the S&P 500. 

Argosy Gaming came out first in 2002. People who got in then had a 63 percent gain by the time the company was sold in 2005, vs. 26 percent for the big stock index in that period.

The Post-Dispatch ranks companies by financial performance, not stock price. But there is evidence that suggests buying today’s hot stocks is also a bad strategy for the long haul.

For instance, Abdulaziz M. Alwathainani of York University in Toronto studied stock data for 1963 through 2007. He grouped companies by how the stock had performed over the past six months, then studied how things went for the next five years. He found that a portfolio of high performing stocks generally did well for the first year — but after that got surpassed by yesterday’s dogs.

The lesson here is to engage the brain before buying, and keep it engaged so that you’ll know when to sell. By all means, look at what happened with a company recently, but know that it’s a weak indicator of what’s coming next.

“You can take a snap shot of what’s happening in the moment,” says Ken Crawford, portfolio manager at Argent Capital in Clayton. “How close is that to when the company had its moment of greatness?”

And how different might things look in six months? Somewhere a gaggle of smart engineers may be screwing together a new super-phone to take a bite out of Apple. A few years ago, solar energy looked like the next hot industry, and MEMC looked like a good bet.

Market pros get paid lots of money to worry about this. They study which competitor is gaining on whom, who has pricing power, who has too much debt, who is inventive and who is not.

Right now, they’re measuring the chance that the American market might be yanked off its feet by a grand goof in Europe. “That’s what makes this job so much fun and so unnerving,” says Crawford.

Amateurs should not try this at home. Most of us don’t have enough time to study enough companies in enough industries to assemble a smart portfolio of individual stocks, then keep up with them so we know when to bail out.

So most of us little guys should buy mutual funds, and leave the stock picking to the pros.