How we grade stock picks

September 24, 2012  |  Finance

While PunditTracker’s scoring system is largely standardized, stock picks are an exception. We measure the “outcome” (and hit rate) of stock recommendations based simply on whether the pick outperforms the market index (typically the S&P 500) over a one-year period, unless otherwise specified. Buy recommendations are graded as correct if they beat the market index, while sell recommendations are graded as correct if they underperform the benchmark.

Our typical calibration for a prediction’s “boldness” to arrive at a letter grade does not come into play with stocks, however. We instead adjust the hit rate for the magnitude of the stock’s outperformance or underperformance relative to the market index. As an example, a stock pick that goes up 15% when the market is down 10% helps a pundit’s grade more than a pick that goes up 15% when the market is up 10%.

By adjusting stock pick returns by the market index returns over the corresponding period, we ultimately arrive at a “normalized yield.” If this figure is greater than $1.00, then the pundit has outperformed the benchmark; less than $1.00 reflects underperformance.

For the Barron’s Roundtable, the current normalized yield is $1.14, meaning that the average Roundtable pick from 2002-2011 outperformed the S&P 500 by 14%. This is a superb result and accounts for the Roundtable’s A+ grade.

For Jim Cramer’s “Featured” stock picks on his Mad Money show, the normalized yield is $0.94, meaning that Cramer’s average pick since 2011 trailed the S&P by 6%.  This mediocre performance to date nets Cramer a D grade.




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