The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Mar. 5, 1997)

Let's take another look at our hypothetical sell-stop cases we've followed over the last few weeks. A hot topic for the growth screens of late has been how to protect against major sell-offs without pulling your hair out.

First of all, let me say that whatever sell-stop discipline one uses, if any, the importance of one increases dramatically the more concentrated your portfolio is in fewer stocks. For example, if you hold 5 stocks and one gets cut in half, your whole portfolio loses 10%, quite a hit from a single stock.

In a more diverse portfolio, though, the risk from single stocks decreases, of course. The same 50% haircut only drops a 20-stock portfolio 2.5%, a much less dramatic hit. So one factor to consider in choosing a selling discipline is to measure how much is at risk with each stock. If your portfolio includes 15-20 stocks, you may feel that sell-stops aren't necessary at all. But if you're using a much more concentrated approach, sell-stops, with all their potential flaws, may be a needed measure of insurance.

On to our test cases. Test case number one is the by now infamous collapse of 3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>. Peaking at $80 1/8 on December 9 (closing prices), the hypothetical stop-loss was set at 25% lower, or $60 a share. That order would have been triggered on February 4. Even with a nice move today, the stock is still only in the mid 30s. That's still less than half of its peak price and 41% below the stop level just over a month later. In this case, I have to score the stop loss a major success.

Case number two was AMERICAN POWER CONVERSION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APCC)") else Response.Write("(Nasdaq: APCC)") end if %>. It peaked at $31 3/8 on January 14 and then triggered its stop-loss at $23 1/2 on January 28. At first, it looked like a bad whipsaw as the stock immediately bounced back, but then sold off again and has stayed below the stop price for the majority of the last month. Today the stock trades just under $20, more than a third off its peak and roughly 15% lower than the stop price. Again, after a full month from the stop date, I'd have to count this a successful stop.

Our third case seems to be following the same pattern as APCC. APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> peaked at $59 on January 30 and then was stopped out at $44 1/4 on February 26. The stock has bounced back a couple of times since being stopped out, only to sell off dramatically again. After dropping again yesterday and today, the stock's now at $37 3/4. That's 36% off its peak and 15% below the stop price. It's still too early to score this one a success or failure, but for now it looks to have been a success.

As I've mentioned before, this is only a three-stock sample, hardly anything statistically significant. When I can I'll test a larger sample of strong stocks in recent years to see how they would have performed with such stops in place, scoring them as winners or losers based on where the stocks traded a month later if they indeed would have been stopped out. I'll report the results here whenever I can carve out the time. Fool on!

Monthly Growth Screens
     (Jan. 3 to present)
  11.48%  Relative Strength  
  11.05%  Low Price/Sales  
   8.86%  YPEG Potential  
   7.21%  S&P 500 Index  
  -1.98%  Investing for Growth  
  -9.65%  EPS Plus RS  
 -14.84%  Unemotional Growth  
 -15.09%  Formula 90  

Annual Value Screens
     (Jan. 1 to present)
   7.81%  Dogs of the Dow  
   7.72%  Dow Jones Ind Avg  
   3.75%  Beating the S&P  
   1.17%  Unemotional Value  
   1.17%  Beating the Dow  
   1.13%  Dow Combo  
  -2.15%  Foolish Four