The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Oct. 9, 1997)

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

Earlier this week I announced a new portfolio that I'm beginning to test -- the Keystone Portfolio. It's a simple model. Beginning with the 100 largest American stocks (by market capitalization), I narrow the field to those stocks (usually around 30) which carry a 1 or 2 Timeliness ranking in the current Value Line Investment Survey. The final ordering screen is the total return over the previous six months.

As I mentioned in my introduction to this portfolio, the top ten stocks as of October 31, 1996 have gained 60% in the subsequent eleven and a half months. Over the same period, the S&P 500 has gained 37%. A 62% out-performance of the index of which these stocks make a very large proportion is encouraging, I think you'll agree.

But a reader wrote me, wondering if the Keystone Portfolio isn't hurting itself by limiting the field to the 100 largest stocks. How would a portfolio do if based on the same screens, but including smaller stocks as well? He even suggested a fine name for the screen, the Limestone Portfolio!

To test this, then, I ran the same series of screens, but used all of the American stocks in the Value Line database on October 31, 1996, choosing the stocks with Timeliness rankings of either 1 or 2 (376 issues), and then sorting them by the previous six month's total return.

The results are hard to generalize about. For one thing, two of the top twenty stocks no longer trade, so I'd have to look up the merger activity that caused them to drop out of the database. With that disclaimer in mind, however, here is a summary of the performance for the other eighteen stocks.

The top five (four actually, as the fifth stock is one that no longer trades) have averaged 30%. This is compared to 58% for the Keystone Portfolio. The problem in the top five for the Limestone Portfolio has been simple inconsistency. One stock gained 130%, but two of the four have lost money for the year.

The top ten (nine, really) for the Limestone Portfolio, however, achieved a massive return of 92% compared to the 60% for the Keystone Portfolio. Can you guess why? Yep, DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>. Dell is sitting on a 382% gain over the last year. Without Dell, the remaining stocks in the top ten averaged 56%, very similar to the Keystone Portfolio's performance.

Extending the field to the top 20, the Keystone Portfolio averaged 53%. The Limestone Portfolio averaged 60% (41% without Dell).

It's only a single year, of course, so the jury must remain out. The Limestone Portfolio may well command better overall returns than the Keystone Portfolio, but it will do so, it seems, with much lower consistency and much higher volatility. (Was choosing Dell a fluke this year, or indicative of the sensitivity of the screens to future stars?) You can't overlook the fact that it selected a winning stock like Dell, but you also need to recognize that Dells don't come along every day and the rest of the Limestone Portfolio was a little less impressive (although still market thrashing).

I'll keep you informed on both versions as we track these portfolios in the future. FYI: the top ten Limestone Portfolio stocks today would be:

Navistar Int'l (NAV)
Dell Computer (DELL)
System Software (SSAX)
Compaq Computer (CPQ)
Arkansas Best (ABFS)
Unisys (UIS)
Titan (TTN)
Michael Foods (MIKL)
NACCO Inds. 'A' (NC)
Safeskin (SFSK)

Fool on!

Monthly Growth Screens
(Jan. 3 to present)
94.62%  Relative Strength  
39.82%  Investing for Growth  
36.50%  EPS Plus RS  
32.85%  YPEG Potential  
29.76%  S&P 500 Index  
29.10%  Unemotional Growth  
28.58%  Low Price/Sales  
25.07%  Formula 90  

Annual Value Screens
(Jan. 1 to present)
28.74%  Dow Combo  
27.38%  Dogs of the Dow  
27.14%  Unemotional Value  
27.14%  Beating the Dow  
25.02%  Dow Jones Ind Avg  
22.79%  Beating the S&P  
21.41%  Foolish Four