Tuesday, January 6, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Jan. 6, 1998) -- Let's wrap up 1997 today and look over the results from our first year's experiments.

To begin, here are the annual totals for our Value screens:

32.53% Beating the S&P

28.25% Foolish Four (the old method)

23.65% Dow Combo

22.64% Dow Jones Ind Avg

20.97% Dogs of the Dow

19.95% Unemotional Value

19.95% Beating the Dow

Ranging from 20% to 33%, it was obviously a successful year for the Dow Approaches and their cousin, Beating the S&P, which led the group on strong gains in some munchable stocks, Sara Lee <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %> and Kellogg <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: K)") else Response.Write("(NYSE: K)") end if %>. The results for BSP continue to affirm the strategy of choosing high-yielding industrial stocks and then holding patiently for capital appreciation. So if you're already a Foolish Four fan and want to expand the number of your holdings without straying too far from the fold, BSP is one place to turn.

For the Growth screens we followed this year, it was a runaway victory for Relative Strength. The following four tables list the returns for each of our holding periods, ranging from one month to one year. In each case, the Relative Strength screen powdered the competition last year. The only exception to this is in the semi-annual holding cycle, where Relative Strength beat all of the other screens but still lagged behind the S&P 500 Index.

Monthly Updates 
 73.42%  Relative Strength   
 29.73%  S&P 500 Index   
 19.71%  Investing for Growth   
 16.98%  EPS Plus RS   
   7.68%  Formula 90   
   4.92%  Low Price/Sales   
   4.02%  Unemotional Growth   
   0.39%  YPEG Potential   
  
 Quarterly Updates 
 32.06%  Relative Strength   
 29.73%  S&P 500 Index   
 17.90%  Low Price/Sales   
 11.57%  Investing for Growth   
   6.37%  Formula 90   
  -0.85%  Unemotional Growth   
  -1.63%  EPS Plus RS   
 -13.94%  YPEG Potential   
  
 Semi-Annual Updates 
 29.73%  S&P 500 Index   
 28.70%  Relative Strength   
 24.35%  Low Price/Sales   
 23.73%  Investing for Growth   
 20.33%  EPS Plus RS   
 18.71%  Formula 90   
   1.64%  YPEG Potential   
 -10.88%  Unemotional Growth   
  
 One-Year Cycle 
 42.08%  Relative Strength   
 29.73%  S&P 500 Index   
 24.82%  YPEG Potential   
 19.31%  EPS Plus RS   
 14.04%  Low Price/Sales   
 13.61%  Formula 90   
   3.49%  Investing for Growth   
  -0.18%  Unemotional Growth   
 

As always, I'm not going to be quick to jump to any definitive judgments based on one year's returns, but some of the general patterns we expected a year ago have been borne out. First, the longer holding periods seemed to provide the value-oriented screens like YPEG Potential and Low Price-to-Sales more time during which the market can begin to appreciate the bargains associated with such screens. Second, the Relative Strength screen's success reaffirms my belief that this is one of the better elements to add to any strategy mix.

The big disappointment, naturally, is the dreadful result Unemotional Growth posted. A 4% gain in a year when the S&P 500 racks up a 30% advance is painful. And the only explanation I have to offer is that earnings momentum strategies seemed to fall out of favor this year. For example, the PBHG Growth Mutual Fund, whose investment strategy has been described as very similar to Unemotional Growth but on a much larger scale, of course, is down some 5% over the last year. Like all strategies, earnings momentum goes in and out of favor, and while it's hardly a comfort to those investors working with the screen, that appears to be what happened in 1997. What's ahead for Unemotional Growth? Sorry, my crystal ball is permanently cloudy.

One final note of comparison, though. A screen we didn't track in the 1997 workshop but are adding for 1998 is the Keystone approach, a large-cap capital appreciation approach with a strong relative strength component. With results through 12/30 (Value Line cut off last week's data early because of the New Year's holiday), the five-stock Keystone screen produced returns of 55.6%, easily surpassing every one of the screens we did track on an annual basis. In fact, even a ten-stock version would have come out on top of our rankings, posting a gain of 44.5%.

The long-term results for Keystone are now virtually a dozen years old. The annualized gain for the five-stock model has been 28.4%, and the ten-stock version not far behind at 25.5%. Meanwhile, the S&P 500 Index has posted an annualized 17.0% and the Beating the Dow approaches have fared slightly better, recording 18.7% gains for the BTD5 and 18.8% gains for the BTD10.

Fool onward with our 1998 experiments!