The Motley Fool: The Foolish Workshop, Friday, February 27, 1998

Friday, February 27, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (February 27, 1998) -- Last year was anything but stellar for the Unemotional Growth approach. As one reader put it today on our AOL message board, the approach suffered from the dreaded Sheard Effect. It seems that every time I announce the results of a new successful back-tested study, the model's doomed to underperform for the next year. UG certainly fit the pattern by barely keeping in the black for 1997 while the market soared.

So far in 1998, though, the UG5 is bouncing back handsomely. For those of you not familiar with Unemotional Growth, it's an aggressive earnings momentum model which requires monthly adjustments to a five- or ten-stock portfolio. From the 100 top-ranked stocks in the Value Line universe, one chooses the five stocks with the highest EPS percentile scores in Investor's Business Daily. Updates are made monthly.

In January, the UG5 model started off with a moderate gain of 4.83%, but it has picked up better than 9% so far this month. (Keep in mind that the UG model's monthly adjustment takes place on the first Friday of each calendar month, so there's still another week to go in our "February" period.) The Standard & Poor's 500 Index is up less than 10% in 1998, while the UG5 is already up better than 14.5%. As everyone who followed UG last year knows, however, this is a very volatile model and the returns can suffer some very abrupt swings. It takes an iron constitution to stick this model out to the letter. (The UG model we follow in the Workshop group is based on a one-year holding period and is likely to underperform the other screens. UG really works best on a shorter cycle.)

Today is also the day we add our third stock to the "Dozens" portfolios. The Dow Dozen addition looks to be either DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> or AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, depending on the precise Foolish Four rankings at today's close. The prices are very close and whichever stock ends up with the lower price is probably going to be the one we need to add.

The Dow Racers (best relative strength Dow stock) will pick up Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> at today's close. Merck is only the third-best stock on the list, but the portfolio already holds the top two: AT&T and Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>.

The Keystone Dozen will be adding the new top-ranked stock, Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>. This makes the second drug stock in the Keystone Dozen. Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> is already in the portfolio along with regional bank stock Fifth Third Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %>.

The PSR Dozen will be adding Whole Foods Markets <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WFMI)") else Response.Write("(Nasdaq: WFMI)") end if %> to the portfolio. Whole Foods is really number three on the current list, but Alaska Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> and VWR Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VWRX)") else Response.Write("(Nasdaq: VWRX)") end if %> are already in the portfolio.

The same is true for the F90 Dozen (Formula90 method), where the new stock, United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USTR)") else Response.Write("(Nasdaq: USTR)") end if %>, is currently number three in the rankings. Both Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> and Safeskin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %> are already F90 Dozen holdings, so we add the next one on the list.

And finally, don't forget to stop by and check out the new rankings, the new database, and the year-to-date returns for our eight screens. Fool on!

[Want to be the first Fool on your block to get a copy of Robert Sheard's forthcoming book? Click here to pre-order your copy of The Unemotional Investor.]