The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (May 27, 1997)

If you've been reading my Workshop reports of late, you know that my research interests have switched from the shorter-term models, such as Investing for Growth and Unemotional Growth, towards long-term models.

The obvious reasons are that so many investors are in tax brackets where the longer-term holding periods (a year or more) give them a significant tax break on their capital gains. The difference between the 28% maximum long-term rate and the 39.6% top short-term rate can make a less attractive gross return actually more profitable after taxes than a short-term program that looks better on the surface. (And the trading costs of the shorter-term programs, of course, are another factor to consider.)

No one yet knows what the capital gains tax cut structure will be, but it's likely that it will affect the long-term rate before the short-term rate, so the attraction for models that hold for more than a year will be even stronger. To that end, I've been working to find some simple and effective strategies.

One I've watched recently is a simple large-cap / relative strength approach with technology stocks, where one takes the biggest stocks and sorts them by relative strength. Over the last two or three weeks, I've written about this experiment several times. But there's no reason the same approach can't be applied to all large-cap stocks, with the understanding that many of the top stocks would be the same on both the technology and "all stocks" list.

For example, if one took the top 100 American stocks in terms of market capitalization at the end of June 1996, then sorted them by their previous six- or twelve-month total return, you'd have a fair list of blue chip stocks that were moving faster than the market, a pretty nice pool from which to draw. (I chose June, incidentally, only because I had a convenient database using that date, not because the date itself was at all significant. And I also eliminated stocks that have run up strictly as a result of a merger negotiation.)

As a sample, then, here are the fifteen stocks (of the one hundred largest American companies) with the best 6-month Total Return as of the end of June 1996, and their returns through this afternoon. (The numbers are afternoon prices and not exactly closing prices today, and the returns do not include dividends or trading costs.)

Cisco Systems (CSCO)       21.9%
Oracle (ORCL)                    20.8%
Microsoft (MSFT)              110.8%
Coca-Cola (KO)                  39.8%
Intel (INTC)                        129.4%
PepsiCo (PEP)                       4.6%
Amer. Home Products (AHP) 23.7%
Citicorp (CCI)                        36.9%
Hughes Electronics (GMH)      -8.1%
United Tech. (UTX)                37.6%
Colgate Palmolive (CL)           45.7%
AlliedSignal (ALD)                  33.7%
General Electric (GE)              40.1%
NationsBank (NB)                  40.4%
Gillette (G)                              41.7%

Top 5      64.5%
Top 10    41.7%
All 15      41.3%
S&P 500 26.7%

All the usual disclaimers apply. The results are for less than a year and any extension of the results beyond the actual data we have is pure speculation. Fool on!

Monthly Growth Screens
(Jan. 3 to present)
27.88%  Relative Strength  
13.59%  S&P 500 Index  
9.72%  Low Price/Sales  
-1.16%  YPEG Potential  
-1.29%  Investing for Growth  
-3.27%  Unemotional Growth  
-12.83%  EPS Plus RS  
-24.30%  Formula 90  

Annual Value Screens
(Jan. 1 to present)
14.50%  Dow Jones Ind Avg  
13.65%  Dogs of the Dow  
8.34%  Beating the S&P  
7.09%  Unemotional Value  
7.09%  Beating the Dow  
6.26%  Dow Combo  
1.08%  Foolish Four