Ten years ago, Schwab unveiled two new approaches to investment research and advice that were created to give people alternatives to traditional Wall Street practices.

In May 2002, Schwab introduced Schwab Equity Ratings®, an objective system for rating more than 3,000 U.S. stocks, and Schwab Private Client, a unique brokerage advice service featuring a 1-1 relationship for clients looking for personalized investment advice from their broker while maintaining close involvement and full control over their investment decisions.

Both of these offers were disruptive in the financial services industry when they were launched and continue to be unique today.

In recognition of these two 10-year anniversaries, we’ll be doing a two-part series this week on the Schwab Talk blog. Today we’ll take a look at Schwab Equity Ratings with Greg Forsythe, CFA, senior vice president with Schwab Center for Financial Research, who oversees Schwab Equity Ratings.

Q: Why did we originally launch Schwab Equity Ratings and what were the initial goals of the offer?

Forsythe: Well, when Schwab Equity Ratings was launched back in 2002, we believed that individual investors needed objective, consistent and simple to understand stock research. At Schwab, we are in a position to provide equity research for clients that is free from many of the conflicts which can be very common with a number of Wall Street firms.

The goals have been very clear from the beginning: to give people objective and easily digestible stock research, and to have our average buy-rated stock clearly outperform our average sell-rated stock over a full market cycle – in other words, from market peak to peak or market trough to trough.

Q: Tell us a little bit about how Schwab Equity Ratings work.

Forsythe: Every week, we look at more than 3,000 stocks and assign ratings of A, B, C, D or F to help identify those that we expect to outperform or underperform the market over the next 12 months. Our expectation is that A-rated stocks will, on average, strongly outperform, while F-rated stocks on average will strongly underperform. As and Bs indicate “buy consideration” and – Ds and Fs indicate “sell consideration.” And we make the ratings available online for clients looking to do their own equity research.

Our equity research methodology generally prefers company characteristics that have stood the test of time in discriminating future relative returns, including factors like cheap valuation, strong cash flow, high quality earnings, positive earnings surprise, and improving investor sentiment.

Our Schwab Equity Ratings International™ which launched at the end of last year is grounded in the same methodology as our domestic ratings, and covers approximately 4,000 large and small cap stocks in 28 foreign equity markets. 

Q: How have Schwab Equity Ratings performed over time?

Forsythe: Since 2002, overall the ratings have performed as expected. Just to give a quick example, the average percent return for A-rated stocks for all 52-week periods since Schwab Equity Rating launched has been 18.64 percent compared to 9.01 percent for the Dow Jones Total Stock Market Index for the same periods of time. There is more performance information online for clients. In keeping with our focus on ensuring transparency, we publicly report the average performance of our ratings.

Q: What have you learned from your work with Schwab Equity Ratings?

Forsythe: At the risk of getting a little technical, Schwab Equity Ratings foundational strategy has always been based on “surprise anticipation.” A stock’s current price generally reflects the collective expectations of its future fundamentals, and meaningful price changes occur when investor expectations change. So if your stock picks experience positive surprises more often than negative surprises, you have a chance to outperform the market over the long term. I talked about this concept and described how we incorporate it into Schwab Equity Ratings in a recent article on Schwab.com.

Q: Have investors changed the way they think about equities over the last 10 years?

Forsythe: If you take a look at the last decade or so, it’s been a tough stretch for investors from the dotcom bust in the early 2000s to the more recent market difficulties that began in 2008. What we’ve seen is that investors are becoming less hooked on hitting a homerun with one or two individual stocks and focusing more on having a holistic financial plan and an appropriately diversified portfolio. That said, stock research and selection is still a very important part of many clients’ overall investment strategy, which is why we think Schwab Equity Ratings continue to play an important role for clients today.

On Thursday, we’ll focus on Schwab Private Client, including why we introduced it and how it has evolved over the past 10 years.

Past performance in no guarantee of future results.   Schwab Equity Ratings, Schwab Equity Ratings International and the general buy/hold/sell guidance are not personal recommendations for any particular investor or client and do not take into account the financial, investment or other objectives or needs of, and may not be suitable for, any particular investor or client. Investors and clients should consider Schwab Equity Ratings as only a single factor in making their investment decision while taking into account the current market environment.

Diversification strategies do not assure a profit and do not protect against losses in declining markets.  International investments are subject to additional risks such as currency fluctuation, political instability and the potential for illiquid markets.

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