Wednesday, December 10, 1997

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Dec. 10, 1997)

We're about three weeks from the end of the 1997 Workshop year (we'll fudge the first Friday rule by one day and close out the books on December 31). So let's look at the seven screens based on the Value Line database that we've tracked in 1997 to see if any patterns are visible.

Through yesterday's close, here are the results for the seven screens, grouped by the four different holding periods we've tracked:

Updating once per Month
80.3%  Relative Strength
29.1%  EPS Plus RS
28.8%  Investing for Growth
18.9%  Formula 90
12.0%  YPEG Potential
11.5%  Unemotional Growth
  5.8%  Low Price-to-Sales

Updating once per Quarter
51.1%  Relative Strength
21.9%  Investing for Growth
21.7%  Formula 90
16.1%  EPS Plus RS
15.5%  Low Price-to-Sales
10.4%  Unemotional Growth
 -8.9%  YPEG Potential

Updating once every Six Months
40.6%  Relative Strength
32.1%  Investing for Growth
30.9%  EPS Plus RS
22.6%  Formula 90
20.4%  Low Price-to-Sales
19.6%  YPEG Potential
 -6.0%  Unemotional Growth

Updating once per Year
57.6%  Relative Strength
33.4%  YPEG Potential
21.6%  Low Price-to-Sales
21.0%  EPS Plus RS
20.0%  Formula 90
  9.3%  Investing for Growth
  3.7%  Unemotional Growth

Conclusions? The most important point to remember is that these results cover such a short time frame that it's impossible to draw any legitimate conclusions, so perhaps I should call this section "Observations."

The most obvious observation is that for 1997, choosing the stocks with the best Relative Strength, over any of the holdings periods, has significantly outperformed all of the other screens. But as I've said several times in the past, this can be misleading for two important reasons. One is the shortness of the experiment. The other is the concentration of the portfolios in five stocks. Any stock blowing the top off the curve as Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> did this year can significantly distort the comparisons.

Keep in mind that the straight RS screen was my original theory when I began developing Unemotional Growth. But after some five consecutive years where the UG approach nearly doubled the returns of the RS method, I began pursuing the UG history more thoroughly. Yet someone looking at the results I've posted here might jump to the conclusion that UG is an awful approach and RS the greatest thing going. This year, that's been true; long term, it hasn't.

Other observations: the two value-oriented screens (Low Price-to-Sales and YPEG Potential) worked much better (as we suspected in January) over the longer holding periods. These strategies look for undervalued stocks and then hold on until the market recognizes the inherent value. They haven't performed nearly as well using shorter holding periods.

Investing for Growth shows promise extending the classic quarterly holding period out to six months. Whether this is true over longer back-tests or not, of course, remains to be examined.

And two closely related strategies, the EPS Plus RS and the Formula 90 screens, performed decently, but not spectacularly over all four holding periods.

The biggest surprise for me, frankly, is the dreadful performance for Unemotional Growth. With the market up approximately 30% for 1997, UG has simply disappointed. And I don't have any explanation for it other than to say, It Happens. Nevertheless, even after a bad 1997, the annualized return for the past eleven years has been 39%. Not bad if you can pull it off in a tax-deferred account to offset the short-term gains.

This final table groups the returns for each screen together so you can see the comparisons by holding period more clearly.

Period    YPEG   IFG    RS    UG EPS+RS   PS   F90
1 Month   12.0  28.8  80.3  11.5  29.1   5.8  18.9
1 Quarter -8.9  21.9  51.1  10.4  16.1  15.5  21.7
6 Months  19.6  32.1  40.6  -6.0  30.9  20.4  22.6
1 Year    33.4   9.3  57.6   3.7  21.0  21.6  20.0

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