The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (May 12, 1997)

Last week, I mentioned that big is often beautiful when it comes to technology stocks. Large-cap market leaders like INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> and MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> have made for genuinely awesome investments for many years. Among the biggest and the most powerful of tech companies, it's an attractive idea to mine this select group for potential winners that are generally more stable than their smaller peers.

How to go about it though? One method is the simplest way: just buy the five biggest Nasdaq 100 stocks and update each year. These won't always be technology stocks, however, so if you want a pure technology play, you may have to eliminate the likes of an AMGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> or an MCI COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %> on occasion.

One researcher tracking this approach over the last six years claims that annual returns equaled 33%. Not shabby, even given that we're in a strong historical period.

Some other options I'd love to test thoroughly, given time and the right database, of course, are variations of this approach. I mentioned last week using Tom Gardner's Cash King approach, where one only accepts stocks sitting on mounds of cash, little or no long-term debt, and Current Assets considerably larger than Current Liabilities. Combine those simple criteria with a market-leading presence like Microsoft and Intel enjoy and you've got a slam dunk. And the returns over many years support it.

Another possibility is to start with a group of the largest technology stocks (say 15 companies), and then perform another screen to weed out the occasional dud like MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MOT)") else Response.Write("(NYSE:MOT)") end if %> has been over the past several years. One potential screen, of course, is Relative Strength. We know from other research (James O'Shaughnessy's tests in What Works on Wall Street, for example) that over longer holding periods, six months or a year, Relative Strength during the previous year is a valuable factor to consider.

What if we just took the top 15 technology stocks (by market-cap) and ranked them by Relative Strength, choosing the top five or even ten? I don't have the data yet to test this historically, but I do have the data from the beginning of 1997, and given the Nasdaq's lagging performance compared to the Dow and the S&P 500, the results year-to-date are enticing. (We all know that four or five months are meaningless, but a spark starts small and then further research sometimes uncovers a volcano.)

Of the largest fifteen technology stocks, here are the five that had the best Relative Strength rankings (from Investor's Business Daily) at the beginning of the year, and their year-to-date returns (through May 9):

Dell Computer (DELL) 74.7%
Intel (INTC) 21.8%
Seagate Technology (SEG) 31.0%
Microsoft (MSFT) 41.3%
Compaq Computer (CPQ) 27.8%

Compare the average return of 39.3% for these five large-cap technology stocks with the major market indices, including the Nasdaq 100:

DJIA 11.2%
S&P 500 11.3%
Nasdaq Composite 3.4%
Nasdaq 100 11.9%

Of course, a lot of history can be checked before we make too much of this and everyone should be warned that such limited data can skew the picture we'd see over a longer period, so take it for what it's worth. It certainly seems worth looking into, however, and I'd gladly work with anyone able to held supply data or who wants to do some legwork to test it further. In the meantime, I'll keep an eye on the performance of this group versus the market. Fool on!

Monthly Growth Screens

(Jan. 3 to present)
25.61%  Relative Strength  
11.98%  S&P 500 Index  
9.75%  YPEG Potential  
7.84%  Low Price/Sales  
-1.60%  Investing for Growth  
-8.62%  Unemotional Growth  
-12.04%  EPS Plus RS  
-19.40%  Formula 90  

Annual Value Screens
(Jan. 1 to present)
14.16%  Dogs of the Dow  
13.02%  Dow Jones Ind Avg  
9.62%  Beating the S&P  
4.88%  Unemotional Value  
4.88%  Beating the Dow  
3.75%  Dow Combo  
-1.99%  Foolish Four