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Assessing the newsletters in a tough market year

The stock market volatility we've seen lately is the sort of thing that makes investors question their ability to pick stocks and mutual funds.

This brings us to investing newsletters, which provide expert stock and fund recommendations. Can you depend on them for guidance in difficult markets? The answer, based on a snapshot review of the picks made a little over a year ago by five investing newsletters, is a qualified yes. Some newsletters did well, others stumbled. The message to investors: Tough stocks markets humble both pro and amateur alike.

Although the S&P/TSX composite total return index made 9.7 per cent (including dividends) last year, overall conditions for people who pick stocks for a living were as challenging as they've been since the last bear market. Take mutual fund managers as an example. In the Canadian equity category, the average return last year was well below the index at 6.8 per cent. Investing newsletters are another example. Some had a decent year in 2007, but the ratio of good picks to bad ones was poor in several cases.

The newsletters were assessed on the year-long performance of the stocks and funds recommended in January, 2007. It's the third year this exercise has been completed, and the toughest.

The average return for the stocks and funds chosen by the five newsletters was 7.7 per cent.

This reflects share price appreciation without dividends, and it doesn't factor in the effect of the Canada-U.S. exchange rate on the handful of American stocks that some of the newsletters recommended. The 7.7-per-cent return is less competitive than it might seem because it's based to a significant extent on some highly successful picks that overwhelmed the more numerous duds and disasters.

Let's review the January, 2007, picks of the five newsletters, which are listed alphabetically.

THE INTERNET WEALTH

BUILDER

Average Return: 17.9 per cent

Ratio of Winners to Losers: 7:7

Best Pick: Petrobank Energy and Resources, up 252 per cent

Worst Pick: Angiotech Pharmaceuticals, down 68 per cent

Overview: All in all, a good year for this weekly e-mail newsletter from personal finance writer Gordon Pape. Winners and losers were evenly split, but many of the losers were blue-chip names that are still defensible picks. Examples: Brookfield Asset Management, Altria Group and a mutual fund, PH&N Dividend Income.

Successes included a mix of blue-chip names such as Fortis and Canadian Utilities and lesser-known names like Stantec and Rocky Mountain Chocolate. The big score was Petrobank, which was suggested by contributor Yola Edwards, a technical analyst. Ms. Edwards also highlighted Angiotech, a speculative health care stock that seems out of step with the more conservative approach shown in the other recommendations.

THE INVESTMENT REPORTER

Average Return: 6.4 per cent

Ratio of Winners to Losers: 16:9

Best Pick: Alcan, up 86 per cent

Worst Pick: Metro Inc., down 28.5 per cent

Overview: As it always does in this annual evaluation, the Investment Reporter came through with solid mid-pack results that reflect its conservative mandate. You can see this in the fact that winners outnumbered the losers, and that none of the losers was annihilated.

Oddly, this was the only newsletter to pick Alcan, which soared in price as a result of a takeover by metals giant Rio Tinto that was completed in 2007. Results for this newsletter's '07 picks would have been better if its three bank selections, Bank of Montreal, Bank of Nova Scotia and National Bank of Canada, had not been caught in the current bear market for financial stocks.

NA MARKETLETTER

Average Return: 8.6 per cent

Ratio of Winners to Losers: 7:9

Best Pick: Aur Resources, up 91 per cent

Worst Pick: Birim Goldfields, down 24 per cent

Overview: This newsletter serves the needs of traders more than long-term investors by highlighting stocks for readers to buy and then telling them when to get out. This focus on trading helps explain why there were many losers in this newsletter's recommendations, but none of them were catastrophic (down more than 50 per cent, let's say). If a pick doesn't work out, the NA MarketLetter moves on.

The January, 2007, recommendations made by this newsletter featured a mix of speculative resource plays and U.S. pharmaceutical giants. Both ended up as a win-lose proposition. For every Candente Resources (up 56 per cent), there was a GBS Gold (down 19 per cent).

STOCK PICKERS DIGEST

Average Return: -9.2 per cent

Ratio of Winners to Losers: 4:8

Best Pick: Aur Resources, up 97.7 per cent

Worst Pick: Tahera Diamond, down 93 per cent

Overview: This newsletter is from the same family as The Successful Investor and it caters to a more aggressive clientele. Stock Pickers Digest has been a stellar performer in past years, but its January, 2007, picks seem almost cursed. Aur and Oilexco were nice scores, but they were offset by the likes of Tahera, Miranda Gold and American Woodmark, a Nasdaq-listed maker of kitchen cabinets.

Interesting footnote: Tahera was the worst-performing stock among the January, 2006, picks offered by this newsletter. Stock Pickers Digest isn't a flagrant risk taker - larger stocks like Reitmans, Domino's Pizza and Metro Inc. were among its picks a year ago - but it does provide an example of how readers need to do some independent thinking about newsletter stock picks.

THE SUCCESSFUL INVESTOR

Average Return: 14.8 per cent

Ratio of Winners to Losers: 9:4

Best Pick: Agrium, up 89 per cent

Worst Pick: Gennum, down 26 per cent

Overview: Veteran stock picker Patrick McKeough has guided The Successful Investor to strong results in this survey over the past three years by recommending a mix of reliable blue chips and smaller stocks that, in the past year, included names like ShawCor, up 44.8 per cent, and Agrium.

The 14.8-per-cent average return for the January, 2007, picks highlighted by this newsletter beat the market, but it's all the more impressive when you look at consistency. More than any of the other five newsletters, this one managed to be right a lot more than it was wrong last year. Gennum was certainly a misfire, but its decline was overshadowed by the bad picks in other newsletters. The other losers ranged from Canadian National Railway, down 5.6 per cent, to vintner Andrew Peller, down 19.1 per cent.

Rating the newsletters

For the past three years, the Portfolio Strategy column has tracked the stock picks made each January by several major investing newsletters. Here's a review of the results:

Average 12-month return for Jan. '07 picks*Average 12-month return for Jan. '06 picks*Average 12-month return for Jan. '05 picks*
Internet Wealth Builder17.90%2.10%25.20%
The Investment Reporter6.40%15.80%17.50%
NA MarketLetter8.60%10.80%12.90%
Stock Pickers Digest- 9.2%26.10%40.90%
The Successful Investor14.80%11.40%26.30%

*Stocks were assumed to have been purchased at market prices either on the date they were recommended or on Jan. 3, 2007

***

Contacting the newsletters

Internet Wealth Builder

Description: By e-mail 44 times per year

Web: Buildingwealth.ca

Phone: 1-888-287-8229 or 416-693-8526

Cost: $129.95 per year

The Investment Reporter

Description: By mail on a weekly basis

Web: investmentreporter.com

Phone: 1-800-804-8846 or

416-869-1177

Cost: $97 intro rate, $327 regular rate

NA MarketLetter

Description: Distributed electronically

Web: na-marketletter.com

E-mail: Info@na-marketletter.com

Cost: $24.95 (U.S.) per month after a free 30-day trial

Stock Pickers Digest

Description: By mail on a monthly basis

Web: stockpickersdigest.ca

Phone: 1-888-292-0296 or 416-756-0888

Cost: $168 per year

The Successful Investor

Description: By mail on a monthly basis

Web: thesuccessfulinvestor.com

Phone: 1-888-292-0296 or 416-756-0888

Cost: $139 per year

ROB CARRICK/THE GLOBE AND MAIL

© 2007 The Globe and Mail. All rights reserved.

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