The Daily Dow
Friday, August 9, 1996
by Robert Sheard

LEXINGTON, KY. (August 9): There have been many questions recently about the fact that several of the Dow Approach current stocks to buy have DPEG price targets that suggest that the stocks are over-priced. (For the details on the DPEG ratio, check out the Fribble titled "The DPEG Revisited.")

Here's my take on the dilemma. We have decades of data demonstrating how well the Dow Approach has done by using the simple high-yield, low-price criteria. We don't have any data supporting the DPEG ratio as a good predictor for large-cap stocks.

In addition, the research I've come across recently (especially James O'Shaughnessey's new book, What Works On Wall Street, due out this month) demonstrates convincingly that a high yield is the best indicator of value for these large-cap stocks.

So while the DPEG is an interesting factor to watch and consider, my feeling is that if you're using the Dow Approach, don't try to out-smart it on a stock-by-stock basis. I suspect that's the quickest way to ruin its effectiveness. Will it be right in every case? Of course not. It doesn't have to be to be useful, though. As long as it continues to beat the market consistently, and by a significant margin, it's a wonderful approach, even with whatever flaws one ascribes to it. So, above all, keep Beating the Dow author Michael O'Higgins' first rule in mind: Keep it simple!

One more time for Imation! Several people have questioned the way I calculated the cost for Imation in the model, but I've double-checked with 3M's Investor relations department and I did it correctly.

Let's go through an easy example here. Let's say you owned 100 shares of MMM before the spin-off (at $65 per share), for a total investment of $6500. To calculate the new cost basis for your 100 shares of MMM, multiply $6500 times 0.96059. That gives you a new cost basis of $6243.84 (or $62.4384 per share).

Since you received 1 share of IMN for each 10 you held of MMM, you now have 10 shares of IMN. Your cost basis for those ten shares is the difference between your original investment ($6500) and your new MMM cost basis ($6243.84). That leaves $256.16 as your Imation cost basis. The other way to calculate it is to multiply the original $6500 times 0.03941 (the difference between the percentage attributed to MMM and 1.00).

So, with $256.16 as your cost for the new Imation shares, your cost per share is $25.616. Many readers were multiplying the 0.03941 times the original cost per share figure ($65 in this example). That will give you a cost per share of $2.56, which is off by one decimal place. This can't work because the number of shares is different for MMM and IMN. You have to calculate the new cost basis using the total cost first, then calculate your new cost per share from that amount. Hope this helps. Have a good weekend!

Transmitted: 8/9/96

      THE FOOLISH FOUR MODEL (8/9/96)  

           Day    Week   Quarter  Year   History
Fool-4   -1.31%  -0.99%  -0.64%  12.33%  12.33%
DJIA     -0.56%   0.03%   0.47%  11.03%  11.03%
S&P 500  -0.07%  -0.06%  -1.27%   7.50%   7.50%
NASDAQ   -0.02%   1.10%  -4.03%   8.09%   8.09%


Bought  #    Stock     In At   Now    Change

1/2/96  142  DuPont    69.88  82.63   18.25%
1/2/96  148  E. Kodak  67.00  76.25   13.81%
1/2/96  380  Chevron   52.38  57.75   10.26%
1/2/96  149  3M        63.76  65.63    2.93%
7/16/96  14  Imation   26.16  22.88  -12.55%

Bought  #    Stock         Cost        Value      Change

1/2/96  142  DuPont      $9,922.25  $11,732.75  $1,810.50    
1/2/96  148  E. Kodak    $9,916.00  $11,285.00  $1,369.00    
1/2/96  380  Chevron    $19,902.50  $21,945.00  $2,042.50    
1/2/96  149  3M          $9,500.09   $9,778.13    $278.03   
7/16/96  14  Imation       $366.21     $320.25    $(45.96)  

      CASH      $1,106.15      
      TOTAL    $56,167.28      



Transmitted: 8/9/96

      
      

      
      

        

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