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New Stock Research Tools for 2006

To help you get your new year off to a good start, here are three relatively new investing tools that I haven’t mentioned before.

Reduce Risk
We’d probably all like to know the level of risk inherent in stocks that we’re evaluating. For instance, suppose you were considering two stocks with the same price appreciation potential. If you knew that Company A’s stock was twice as risky as Company B’s, your choice would be obvious.

But how do you measure risk? Many investors rely on a statistical factor called “beta,” which measures historical price volatility. Unfortunately, research shows that beta has little predictive value in terms of future risk.

That’s where Barra comes in. Based in Berkeley, California, Barra’s business is developing risk assessment and management tools for institutional investors. Fortunately, Smart Money Magazine makes one of those tools, Barra’s Risk Factor, available at no charge.

The Risk Factor analyses a stock using 40 data items including fundamentals such as dividend yield, earnings, sales, and company size. Barra also considers market factors such as a company’s industry and technical indicators such as recent price action and trading volumes.

Barra rates each stock on a 1 to 100 scale where the higher the number, the higher the risk. Using it is intuitive. A stock with an 80 Risk Factor is twice as risky as one rated at 40.

You can see Barra’s Risk Factor for almost any stock by entering your stock’s name or ticker symbol in the “Search” box on Smart Money’s homepage (www.smartmoney.com) and selecting Key Statistics from the dropdown menu.

Pick Hot Industries  
Many experts tell us that picking the right industry is more important than picking the right stock. My experience bears that out. While there are often exceptions, stocks in the same industry usually move in the same direction, whether up or down. That stands to reason since firms in the same industry are affected in similar ways by market and economic conditions.

The challenge is spotting hot industries before you’ve missed the boat. Several financial sites have industry tracking features, but I’ve found that in many cases, the data is unreliable. Often an apparently hot industry is comprised of only two or three stocks, or its performance figures were distorted by one or two very cheap stocks (under $1) that doubled in price.

Barchart.com (www.barchart.com) has been operating its financial website since 1995, but I only noticed its industry rating system a short time ago. Barchart divides the market into more than 200 industry groups, and then ranks them according to a factor it calls “weighted alpha.”

Alpha is a standard statistical measure of a stock’s price movement over the past year. Barchart’s weighted alpha is similar, except that it gives the most weight to recent price activity. A positive weighted alpha means that a stock has moved up over the past year and negative numbers mean that it dropped. Barchart computes each industry’s weighted alpha by averaging the weighted alphas of the stocks making up the industry.

On its industry ratings page, Barchart lists all industries sorted by weighted alpha, with the strongest at the top. You can click on an industry name to see the stocks making up the industry, also sorted by weighted alpha. I checked the stocks in many of the industries, and in my view, Barchart’s industry definitions are the best available.

Many investors who pay attention to industry strength, like to buy the strongest stocks in a hot industry. You can use weighted alpha to pick the strongest stocks, or you can sort the list using several other factors provided such as year-to-date gain or relative strength (another price action gauge).

Find Barchart.com’s industry ratings from its homepage by selecting Advanced Equities and then Sectors.

Better Screener
Screening, the process of searching through all listed stocks to find those meeting your requirements, is a good way to find investing candidates. 

In past columns I’ve described free screening programs such as Business Week’s easy to use Advanced Stock Search (no longer available). I’ve also described more powerful, but harder to learn free screeners such as Reuters’ PowerScreener Lite (www.reuters.com) and MSN’s Deluxe Screener (money.msn.com).

However, even the Reuters and MSN screeners pale compared to Portfolio123’s new screener that it introduced last year. It offers a much larger selection of screening variables than the others. With it, you can run sophisticated searches using financial statement factors, growth rates, and other items not available with the other screeners. In terms of difficulty, Portfolio123’s screener is about the same as the MSN and Reuters’ screeners.

On the downside, Portfolio123’s free version of its screener, as is the case with Business Week’s Advanced Stock Search, doesn’t allow you to save your screens. That feature requires upgrading to the full-featured version, which will set you back around $40 per month. Reuters also recently introduced its premium PowerScreener 3.0, for the same price. However, Portfolio123’s version offers more features.

After you register, access Portfolio123’s screener from the top menu on its homepage (www.portfolio123.com).