The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (September 4, 1997)

Scroll to the bottom for year-to-date Growth and Value Screen results.

Continuing our discussion of the potential for using Relative Strength as a useful screen with large-cap stocks, I'd like to present today some astonishing numbers from an informal study I did recently. But before you "ooh" and "ah" over the compound return, I need to lay out all the disclaimers.

The way I performed the test was to use the screening software from Value Line, so the field of stocks is limited to some 1500 American stocks. The first screens I performed were by market capitalization and location. Value Line includes any stock with a current market cap greater than $5 billion in its field of large caps (and 336 of them were listed as U.S. companies).

The big disclaimer in this study is that the 336 companies in that list today weren't all in the large-cap group over the entire last decade. I simply don't have the data to run that test for each year separately. So keep that in mind when examining the following results.

I sorted the group of 336 stocks each year from 1987 to the present by the previous year's total return (a proxy for Relative Strength). I then selected the 15 top stocks each year for inclusion in the next year's group. So, the 15 best-performing stocks in 1987 made up the portfolio for 1988, the best in 1988 were included for 1989, etc.

The results? Phenomenal. The annualized return from the beginning of 1988 through August 27 of this year was an astounding 52%. There were a number of stocks over the years that exploded with monumental gains, similar to the awesome performance in DELL COMPUTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> over the last two years.

Here are the year-by-year returns since 1988:

1988    11.75%
1989    61.55%
1990    11.00%
1991  126.71%
1992    26.43%
1993    57.24%
1994    42.40%
1995  111.38%
1996    37.83%
1997    55.25% (through 8/27)

Again, the fact that I'm looking somewhat backwards at the group of stocks may "taint" these results to some degree, but I don't think it strikes a fatal blow to the theory. I've looked at a similar screen with all of the stocks in the Value Line universe, regardless of market capitalization and the screen seems to work well there also.

And while I can't verify my theory without a different set of data (to which I don't have access), I suspect using a 6-month total-return screen might work even better than the 12-month screen I've tested here. Over short time frames, the 6-month returns worked very well as a screen for these large caps.

I'll present the results of the test for the entire universe of stocks in tomorrow's report. In the meantime, as James O'Shaughnessy claimed in What Works on Wall Street, "winners continue to win."

Monthly Growth Screens
(Jan. 3 to present)
76.47%  Relative Strength  
34.68%  Investing for Growth  
24.45%  S&P 500 Index  
23.27%  Low Price/Sales  
21.15%  EPS Plus RS  
19.43%  YPEG Potential  
15.85%  Unemotional Growth  
11.83%  Formula 90  

Annual Value Screens
(Jan. 1 to present)
23.79%  Dogs of the Dow  
22.01%  Dow Jones Ind Avg  
19.93%  Beating the S&P  
18.76%  Dow Combo  
18.01%  Unemotional Value  
18.01%  Beating the Dow  
10.64%  Foolish Four