The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Oct. 8, 1997)

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

I love the Dow Dividend Approaches; there's no secret about that. They've generated market-thrashing returns for my entire lifetime, so it's silly to complain about their performance. But a number of readers have wondered if there's an even better method for picking the winners from among the Dow 30, using perhaps a screen that involves relative strength. I admit I'm intrigued as well, but haven't had the time in the past to test any such theories.

It's time.

There are a number of ways to test these possibilities, so let me discuss some of my preliminary ideas and then I'll look for your responses in the Workshop message folder.

The simplest method, of course, would be to pick the stocks from the Dow that performed the best the previous year -- a straight 12-month Total Return screen. I ran a very quick test today using such a screen since 1987 on the 30 current Dow stocks. (Keep in mind that these stocks weren't in the Dow for the whole decade. This is just a practice run.)

Picking the top ten based on the previous year's returns, we would have had a 22% annualized return from 1988 through last week. That's not shabby, so it warrants a closer and more precise look. I'll look at the actual stocks that were in the Dow in each year when I run such a test, and I'll also run the numbers for a 5-stock version.

Another possibility is to screen the stocks exactly the same way, but use a 6-month total return test instead of a 12-month test. That takes a bit more time to research, so I've only managed to do it for 1997 so far.

The top five stocks going into 1997 were INTERNATIONAL BUSINESS MACHINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>, DUPONT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %>, TEXACO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TX)") else Response.Write("(NYSE: TX)") end if %>, J.P. MORGAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %>, and EXXON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %>. Texaco, of course, has since been removed from the Dow, but at the beginning of the year it was still a Dow component so I'm including it here. Through last weekend, these five stocks were up 26.63%, a little better than the Dow and three points better than the Beating the Dow Five. If we extend the field to the ten best stocks, the return is very similar, 27.57%, which also leads the Dow and the High-Yield 10 by a small measure. Without testing more history, though, there's no way to make any meaningful comment on this strategy.

A third possibility would be to take the High-Yield 10, but instead of sorting them by stock price as we do for the various Dow Dividend Approaches now, sort them by total return over the previous six or twelve months.

Screening the High-Yield 10 for 1997, using a 6-month total return test, the top five would have been 3M <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %>, DuPont, Texaco, J.P. Morgan, and Exxon. In other words, four of the five stocks are the same as our earlier test that disregarded dividend yield. The five High-Yield, High Relative Strength stocks are up 26.75% for the year.

For your information, the top ten Dow stocks today, based on the past six months' total return, are:

International Business Machines (IBM)
Travelers Group (TRV)
Caterpillar (CAT)
American Express (AXP)
General Electric (GE)
International Paper (IP)
Hewlett-Packard (HWP)
Goodyear Tire (GT)
Wal-Mart (WMT)
AT&T (T)

While I have no conclusions to offer, this is an area I wish to examine in coming weeks. I'll let you know how the results turn out, good, bad, or indifferent. Fool on!

Monthly Growth Screens
(Jan. 3 to present)
95.13%  Relative Strength  
40.79%  Investing for Growth  
37.07%  EPS Plus RS  
32.48%  YPEG Potential  
30.19%  S&P 500 Index  
28.45%  Unemotional Growth  
27.66%  Low Price/Sales  
25.40%  Formula 90  

Annual Value Screens
(Jan. 1 to present)
28.28%  Dow Combo  
27.75%  Dogs of the Dow  
27.22%  Unemotional Value  
27.22%  Beating the Dow  
25.54%  Dow Jones Ind Avg  
23.04%  Beating the S&P  
21.88%  Foolish Four