The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Feb. 28, 1997)

This month's rapid decline for APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> brings up an issue I addressed in the assumptions underpinning the Unemotional Growth model. Applied Magnetics isn't a UG stock, of course, but the principal in question is relevant nonetheless.

In my first model, Investing for Growth, I argued that one should let stocks grow unchecked as long as they remain in the rankings. But after a couple of high-profile "lessons," most notably MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> and its 60% to 70% slide in late 1995, I've revised my approach a bit.

As a way to protect against a stock growing to such a large proportion of the overall portfolio, with Unemotional Growth I suggested that periodic rebalancing of all the positions in the portfolio (evening them out) might serve as a good protective measure against rockets plummeting back to Earth.

A drawback here is that a stock enjoying a long-term advance might lose a little of its gains because you would periodically be putting some of the profits into the other issues that haven't grown as well. But when the inevitable downturn comes, the position won't be so large that its decline devastates the entire portfolio.

In a very condensed form, this is precisely what has happened in the Relative Strength screen with Applied Magnetics in January and February. APM soared about 75% in January. With a week left in our February period (we go from first Friday to first Friday), the stock is back down 30% from the end of the January period.

Letting APM go without any rebalancing has resulted in a net gain of only 22.5%. But by taking some of the profits out of APM with the February update and spreading them around in the other positions, the February 30% loss would have been coming out of a smaller position, thus protecting some of the gains from January, subject, of course, to how well the other stocks in the portfolio do.

Granted, this strategy comes with additional trading costs and is most suited for larger portfolios and only at deep-discount brokers, but it's a different angle on the idea of protecting gains, perhaps an alternative to sell stops.

Don't forget the Thoroughbred Stock Challenge. Monday's opening bell is the deadline for your entries into the March game. Join us and see how your stock-picking prowess stacks up against hundreds of others around the world.

Monthly Growth Screens
     (Jan. 3 to present)
  10.68%  Relative Strength  
   9.27%  Low Price/Sales  
   6.63%  YPEG Potential  
   5.72%  S&P 500 Index  
  -4.22%  Investing for Growth  
 -15.92%  EPS Plus RS  
 -16.16%  Unemotional Growth  
 -17.79%  Formula 90  

Annual Value Screens
     (Jan. 1 to present)
   6.66%  Dow Jones Ind Avg  
   6.43%  Dogs of the Dow  
   5.45%  Beating the S&P  
   2.78%  Unemotional Value   
   2.78%  Beating the Dow  
   2.12%  Dow Combo  
   1.33%  Foolish Four