The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, Kentucky (January 22)

Scroll to the bottom for today's Growth and Value Screen numbers.

With the Relative Strength growth screen spurting to impressive early gains in 1997, it's obviously attracting some interest. And even though I'm always hesitant to spoil a good party, I have to turn down the stereo on this one just a bit.

When I first started researching the correlation between Value Line's Timeliness rankings and Investor's Business Daily's RS and EPS rankings, my enthusiasm was for the Relative Strength numbers. I had seen some exciting growth in top-ranked stocks with high RS scores and wanted to see for myself whether it was a coincidence or a pattern that worked consistently well.

But as I started digging back in the archives of older Value Lines and IBDs, it became apparent, not that the RS wasn't working, it was, but that it was only mediocre. But the EPS screen was recording phenomenal gains year after year.

When I had worked my way back in the archives to 1992, I stopped to make a comparison so I could focus my limited time in the most fruitful direction. It was obvious after looking at the five years' worth of data that the monthly EPS screen was significantly and consistently out-performing the monthly RS screen.

At that point I put the RS screen away and focused on the EPS screen which has developed into Unemotional Growth. But with the excitement generated by Relative Strength in January, readers naturally wanted more than just my memory of a weak performance for RS. Fortunately, I was able to pull up the majority of that test from 1992-1996 on an old Zip disk this morning and re-create the five-year record almost completely.

I'm still searching for five prices to finish the entire five-year test, but the results are compelling nevertheless. A note about my method here. This test assumed a monthly update and completely balanced positions in all five stocks every month. The first screen was the Value Line top 100 stocks, the second screen was the highest RS rankings, and then EPS rankings were only used as tie-breakers for the final spot. When that couldn't break the tie, all identically ranked stocks were included. I've listed the returns side-by-side with the Unemotional Growth returns using the same methodology, only switching the order of the EPS and RS screens.

Year      UG        RS        
1992    38.44%     15.85%
1993    35.52%     27.92%
1994     4.15%     12.57%
1995    53.43%     12.87%
1996    87.95%     32.47%

The compound growth rates over those five years were 41.31% and 20.06% respectively.

Of course, this is just five years' worth of data, but with such impressive out-performance over that span, I naturally turned my attention to the EPS ranking rather than my original interest, the RS ranking. In coming months, when I can steal some time, I'll flesh out the details of the other five years of data (1987-1991).

The point of all this, though, is just to caution you against putting too much emphasis on the terrific returns the five Relative Strength stocks have posted in the first three weeks of 1997. Over a much longer period, the screen hasn't performed as well as the UG approach, which has a longer track record and better results. When I find those final five prices, I'll update these numbers into the permanent Workshop essay on the Relative Strength screen.

Stay Foolish!

For those of you playing the little game I developed for a fun way to experiment with these screens, the new entry form for February's Thoroughbred Stock Challenge is up on the website and ready for your submissions. I will accept entries (based on the date and time-stamp provided by the server, so leave yourself some room for slow connections) up until the opening bell rings on Monday, February 3.

Monthly Growth Screens
      (Jan. 3 to present)
 19.57%  Relative Strength  
 13.60%  YPEG Potential  
 10.71%  Low Price/Sales  
  7.40%  Investing for Growth  
  5.15%  Unemotional Growth  
  5.11%  S&P 500 Index  
  4.11%  EPS Plus RS  

Annual Value Screens
     (Jan. 1 to present)
  6.57%  Dogs of the Dow  
  6.23%  Dow Jones Ind Avg  
  5.62%  Beating the S&P  
  3.84%  Dow Combo  
  2.83%  Unemotional Value  
  2.83%  Beating the Dow