Fool.com: A Few Good Stocks (Foolish Four) June 23, 1999

<FOOLISH FOUR PORTFOLIO>

Baltimore, MD (June 23, 1999) -- We're now up to the third chapter in the Beating the S&P (BSP) primer. Last week we followed our step-by-step recipe to find a diversified group of 30 stocks that would serve as a surrogate for the 30 stocks in the Dow Jones Industrial Average. We call these stocks the BSP 30.

The next, and last, step involves choosing the actual stocks in which to invest. This phase is really the fun one, when our general theorizing quickly evolves into a short list of specific companies that we'll live with for a year. Fortunately, this step is also the easiest. The general concept is based entirely on the time-proven, Dow-tested, formula of looking at each stock's yield and price to find a subset of "dog" stocks that are ripe for a turnaround.

Here's how it's done:

1. Start with the BSP 30 stocks. Look up the dividend yield and price for each. Any newspaper or online quote system will serve this purpose, although the Wall Street Journal was officially used for backtesting. List the BSP 30 stocks in dividend yield order, highest to lowest. The 10 highest yielding stocks are called the BSP 10, or the "Dogs of the S&P."

2. Take the BSP 10 stocks and list them in price order, from lowest-priced to highest. The lowest-priced stock on the list has tended to underperform (the "too much of a good thing" phenomenon), so we drop it. The next five least expensive stocks will be the BSP Portfolio stocks. We call these stocks the BSP 2-6, to indicate that they are the second through sixth lowest-priced stocks of the BSP 10.

3. Buy equal dollar amounts of the BSP 2-6 stocks. Hold them for a year (and a day, if capital gains are a consideration). After that time, the portfolio is rebalanced: Sell any stocks not on the current list and use the proceeds to buy the new BSP 2-6. The details for this transaction are described here (way down at the bottom of the article under "To balance your portfolio").

Now you're set! As of the close of trading yesterday, the current BSP 10 stocks, listed from lowest price to highest, were:

                                   Yield          Price        
  1. PepsiCo<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>            1.50%         $36.06
  2. Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>            1.39%         $42.50
  3. Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>                3.36%         $54.81
  4. Xerox <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %>             1.40%         $57.25
  5. Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %>          2.89%         $58.19
  6. Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %>        1.67%         $64.75
  7. Anheuser-Busch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %>    1.59%         $70.62
  8. BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>       2.51%         $71.75
  9. Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>   2.01%         $81.75
 10. Mobil <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOB)") else Response.Write("(NYSE: MOB)") end if %>             2.33%         $98.00

BSP 2-6, the BSP stocks to buy as of yesterday's close, would have been Gillette, Ford, Xerox, Bank One, and Fannie Mae. We drop PepsiCo since it's the cheapest.

Can we apply the RP variation to the BSP 30 stocks to come up with a Foolish Four BSP Portfolio? Sure can! Using the RP formula (yield/square root of price) for our BSP universe of 30 stocks and dropping the first stock on the list produces the following four choices (again current as of yesterday's close): Bank One, BankAmerica, PepsiCo, and Mobil. It's important to keep in mind, though, that although the BSP RP4 outperformed the BSP 2-6 last year and is ahead again this year, the BSP-RP method hasn't been fully backtested.

The entire process of choosing the Beating the S&P stocks, from finding the annual BSP 30 companies to selecting the current stocks in which to invest, will probably take less than an hour. That's not too bad for a year's worth of investing in a strategy that has easily outpaced the S&P 500 for the past 12 years. But we've made it even simpler for you, dear Fools. The Motley Fool stock calculator instantly performs the grunt work, allowing you to choose the current BSP stocks with the minimum of fuss and a whole lot less muss. Check it out!

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[Editor's Note: Following are the returns of a "paper" Beating the S&P portfolio that Ethan has been reporting on in the Foolish Workshop for many months. The stocks were selected December 31, 1998 and "purchased" in equal dollar amounts. They will be "held" for one year.]

Beating the S&P year-to-date returns (as of 06-22-99):

Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>      +31.9%
Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %>     +6.7%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>     -20.8%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>       -5.0%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>   +20.8%
Beating the S&P                +6.7%
Standard & Poor's 500 Index    +9.3%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P               +20.6%
S&P 500                       +18.0%

$10,000 invested on 1-2-87 now equals:
Beating the S&P             $101,800
S&P 500                      $77,800

Today's Stock Lists | 1999 Dow Returns

06/23/99 Close

Stock Change Last -------------------- CAT - 9/16 59.63 JPM -4 3/8 130.63 MMM +1 5/8 91.25 IP + 13/16 53.44

Day Month Year History FOOL-4 -0.24% 4.24% 26.57% 28.45% DJIA -0.51% 1.01% 16.96% 16.50% S&P 500 -0.21% 2.40% 9.03% 9.29% NASDAQ +0.68% 5.17% 18.49% 20.12% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 59.63 38.41% 12/24/98 14 3M 73.57 91.25 24.03% 12/24/98 9 JP Morgan 105.51 130.63 23.80% 12/24/98 22 Int'l Paper 43.55 53.44 22.70% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1431.00 $397.00 12/24/98 14 3M 1030.00 1277.50 $247.50 12/24/98 9 JP Morgan 949.62 1175.63 $226.01 12/24/98 22 Int'l Paper 958.12 1175.63 $217.51 Dividends Received $49.99 Cash $28.26 TOTAL $5138.00