The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Oct. 16, 1997)

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

Continuing our Large-Cap Week in the Foolish Workshop, today we're going to look at the first of two relative strength screens for use with the largest stocks in America. (On Monday, I included a list of the 100 largest American stocks. On Tuesday, I discussed the Bits & Bytes Portfolio. And yesterday, I recapped some high-yield approaches, including Beating the S&P.)

It's no secret I'm a fan of the Value Line ranking system. With a 35-year real-time record of market-thrashing returns for the stocks ranked highly by the system, it's always appealed to me as a logical starting point for my own stock-selection strategies. But with the changes in tax laws and my desire to hold stocks longer to reduce trading, I've gravitated towards larger stocks that I'm comfortable buying and holding for at least a year, preferably more. I don't believe, however, that one has to sacrifice returns to follow such an approach. It simply calls for a strategy with which to choose the best from among a subset of larger stocks. That's my goal with every screen I examine.

One approach I'm following closely is called the Keystone Portfolio, where I marry the Value Line ranking system for Timeliness with the top 100 stocks and relative strength to choose a portfolio of strong blue chips (more on this in tomorrow's column).

But some readers have suggested I open the field a bit to include more stocks that can be legitimately considered large-caps. So as a comparison screen, let's look at another one called the Capstone Portfolio.

The Capstone Portfolio also comes from the Value Line universe of stocks and begins with all the American stocks considered large-caps (over $5 billion in market cap). Then the simple screen used to rank these stocks is Total Return over the previous year. In a previous article I did an unscientific test of this approach with terrific results over the past decade, but make sure you read the caveats in that article about the testing methodology.

If I were going to use this as a real portfolio tool in the future, I would add an additional screen and perhaps modify the time period for the Total Return screen to six months (as I do in the Keystone Portfolio). The additional screen would require the stock to have a Timeliness ranking of some sort. Value Line removes a stock's Timeliness ranking after a merger is announced and we don't want to buy a stock for future growth that has only climbed recently because of an announced merger.

Using Friday's Value Line database, the list of current stocks for a Capstone Portfolio using a one-year Total Return screen would include:

Dell Computer (DELL)
Quantum Corp. (QNTM)
Applied Materials (AMAT)
KLA-Tencor (KLAC)
Compaq Computer (CPQ)
EMC Corp. (EMC)
Texas Instruments (TXN)
ENSCO International (ESV)
Schwab (Charles) (SCH)
Merrill Lynch & Co. (MER)
AES Corp. (AES)
State Street Corp. (STT)
SLM Holding (SLM)
America Online (AOL)
Franklin Resources (BEN)

Shortening the Total Return screen to a six-month period, the following fifteen stocks would be atop the list:

Dell Computer (DELL)
Compaq Computer (CPQ)
Bay Networks (BAY)
Nextel Communic. 'A' (NXTL)
Tele-Communic. 'A' (TCOMA)
Guidant Corp. (GDT)
Applied Materials (AMAT)
Digital Equipment (DEC)
America Online (AOL)
Franklin Resources (BEN)
Progressive (OHIO) (PGR)
State Street Corp. (STT)
Merrill Lynch & Co. (MER)
Computer Associates (CA)
Quantum Corp. (QNTM)

Whether such a marriage between Relative Strength (Total Return) and large-cap equities is fruitful over the long haul is still open to speculation, of course, but the history I've looked at suggests to me that it may have terrific potential for an investor looking to gain some measure of stability from larger stocks without abandoning the returns typical of growth-oriented investment strategies.

Join me tomorrow as I conclude with the Keystone Portfolio and a host of rankings using the latest numbers. Fool on!

Monthly Growth Screens
(Jan. 3 to present)
90.24%  Relative Strength  
39.45%  Investing for Growth  
34.76%  EPS Plus RS  
27.71%  S&P 500 Index  
27.46%  YPEG Potential  
25.24%  Unemotional Growth  
23.46%  Low Price/Sales  
22.26%  Formula 90  

Annual Value Screens
(Jan. 1 to present)
27.70%  Dow Combo  
26.06%  Dogs of the Dow  
25.96%  Unemotional Value  
25.96%  Beating the Dow  
24.04%  Beating the S&P  
23.12%  Dow Jones Ind Avg  
18.78%  Foolish Four