The Motley Fool: The Foolish Workshop, Wednesday, November 26, 1997

Wednesday, November 26, 1997

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (November 26, 1997) --

What do we have to be thankful about in the Foolish Workshop?

$8 trades at deep-discount brokerages.

Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>.

Databases full of easily screened factors to make research easier for the individual.

Exciting strategies to help us pick winning stocks, like…

Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>.

A lively workshop discussion in the message board folder where we can cheer…

Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>.

Low margin interest rates at deep-discount brokers.

Market-beating historical returns for several workshop models thanks to stocks like…

Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>.

The fact that, despite our inevitable mistakes, things could be worse: we could be in mutual funds…

or we could have shorted Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>.

Seriously though, Fools, have a great Thanksgiving and I'll be back with you on Monday. I'm away from a computer for the holiday so the Workshop database and the weekly Rankings will be delayed until Sunday for AOL readers (where I can post the database myself) and probably Monday for the web readers (where a different set of Fools does the formatting). I'll post the current rankings in the AOL message folder Sunday as well and then again for everyone in my column on Monday. Sorry for the inconvenience.

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The Disclaimer

This model history only extends for eleven years (to the beginning of 1987), a decade which by any measure has been a fine one for equities. It may or may not represent the kind of actual returns one might achieve with such a model in the future. Reader beware.

The Method

Because of the nature of the older data disks, I had to alter my original Keystone method ever-so-slightly to make the screens usable in the older data format. But I settled on a method that results in virtually the same set of stocks.

The first screen is to filter only those stocks from the Value Line universe with Timeliness rankings of either 1 or 2. The Timeliness ranking is Value Line's quantitative ranking system which suggests which stocks will perform the best over the coming year. It's been a successful ranking system since 1965.

From the group of stocks remaining, select the thirty American stocks with the largest market caps. This is where the method deviates slightly from my original method. The old data format doesn't have a filter element for foreign stocks. I had been starting with the 100 largest American stocks and then filtering it down to the ones with high Timeliness rankings. The resulting list was usually 25-35 stocks. Trying to identify the 100 largest American stocks in the historical data, though, was cumbersome without that International filter, so I settled on a fixed number of stocks to work with (30) which means my actual field of large-cap stocks will fluctuate around the 100 level. The final result is virtually the same but will now be more consistent. There will always be 30 Keystone stocks using the newer method.

The final screen is to take the thirty Keystone stocks and sort them in descending order by 26-week Total Return. Buy in equal-dollar amounts and hold for a year.

The Performance

Now to the good stuff. The benchmarks we need to compare this model to are the S&P 500 (with dividends) and the Dow Approaches, which also buy mechanically and hold for a year.

From January 1, 1987 through November 19, 1997 (nearly eleven years), here are the returns for our benchmarks, including the value of a portfolio starting with $10,000 (without taxes):

16.7%  S&P 500 Index          $54,002
18.4%  Beating the Dow 5      $63,122
18.3%  Beating the Dow 10     $62,268

Over the same period, here are the annualized returns and portfolio totals for five- and ten-stock versions of the Keystone Approach:

30.2%  Keystone 5             $177,073
25.5%  Keystone 10            $118,300

Perhaps the hidden story here is that the year-to-year returns for both versions were so stable. The 10-stock version had no losing years while the 5-stock version had one down year in 1990 (a loss of only 0.3%). The Beating the Dow versions lost significantly more in the 1990 recession, 17% for the BTD5 and 10% for the BTD10. The S&P 500 lost 3% in 1990. The Keystone Five only trailed the S&P 500 in two years. The Keystone Ten only trailed the index in a single year.

Here are the year-by-year returns for the Keystone Models, the S&P, and the BTD versions.

Year  Key 5   Key 10  S&P 500  BTD 5    BTD 10
1987  23.8%   15.8%     5.2%    12.1%     9.1%
1988  14.3%   18.6%    16.8%    14.8%    18.0%
1989  59.2%   55.5%    31.5%    12.3%    29.7%
1990  -0.3%    1.3%    -3.2%   -17.3%   -10.0%
1991  73.1%   61.8%    30.6%    59.1%    44.0%
1992   7.9%    4.0%     7.8%    20.0%     6.2%
1993  34.8%   13.7%    10.1%    30.5%    23.7%
1994   9.0%    7.0%     1.6%     6.3%     2.4%
1995  29.1%   39.4%    37.5%    30.3%    37.2%
1996  36.3%   32.1%    23.3%    26.6%    27.5%
1997  63.3%   45.0%    29.4%    21.0%    22.4%
CAGR  30.2%   25.5%    16.7%    18.4%    18.3%

The Current Portfolio

The 1997 version includes these stocks. The returns are through November 19.

 21.0%  Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>
118.5%  Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>
  63.5%  Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>
  63.3%  Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %>
  50.2%  BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>
  51.3%  FreddieMac <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %>
  17.3%  Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>
  23.8%  Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %>
  18.2%  Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>
  22.5%  Monsanto <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %>

63.3%  Keystone Five
45.0%  Keystone Ten
29.4%  S&P 500 Index

The rankings as of Friday, November 21, included:

The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>
EMC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMC)") else Response.Write("(NYSE: EMC)") end if %>
Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>
Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>
AirTouch Communic. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %>
Pfizer, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>
Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>
Dayton Hudson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %>
Halliburton Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %>
Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>

One final disclaimer: Yes, I do use this approach personally and hold a number of stocks included in this report.

Starting this weekend, I'll use this revised screening method for my updates to the Keystone rankings. Incidentally, this week's Workshop database and rankings updates will be delayed because of the holiday. I apologize for the inconvenience, but I'll be away from my computer until Sunday. Fool on!

Year-to-Date Returns
Monthly Growth Screens
58.31%  Relative Strength  
27.11%  S&P 500 Index  
26.66%  Investing for Growth  
14.10%  EPS Plus RS  
  6.77%  Low Price/Sales  
  5.03%  Formula 90  
  3.66%  YPEG Potential  
  2.94%  Unemotional Growth  

Year-to-Date Returns
Annual Value Screens
26.30%  Beating the S&P  
25.99%  Foolish Four
22.63%  Unemotional Value  
22.63%  Beating the Dow  
22.60%  Dow Combo  
22.16%  Dogs of the Dow  
21.10%  Dow Jones Ind Avg

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