The Motley Fool: The Foolish Workshop

Wednesday, March 04, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (March 4, 1998) -- It's time to update the history for the Keystone model. Those of you who are long-time readers know that the Keystone model has been tested back for just over a dozen years and I'm working to test it all the way back to the beginning of Value Line's history (the mid 1960s). But for now, we have 12 years, so let's keep watching.

To choose the Keystone stocks, I screen for the 30 largest American stocks (determined by market capitalization) that carry a Timeliness ranking in the Value Line system of either 1 or 2. Those 30 stocks are then ranked by 26-week total return (appreciation and dividends). Regardless of how many stocks one chooses, they're held on an annual cycle. (Despite the lower taxes for an 18-month holding, such a cycle has not proven better after taxes for models based largely on relative strength.)

From January 1, 1986 through February 25, 1998, the annualized returns for the various sized Keystone models and a few relevant comparisons are as follows:

 
 28.4%  Keystone 5 
 25.7%  Keystone 10 
 24.1%  Keystone 15 
 23.1%  Keystone 20 
 21.3%  Keystone 25 
 20.8%  Keystone 30 
  
 19.0%  Beating the Dow 5 
 18.8%  High Yield 10 
 17.5%  S&P 500 Index (with dividends)

Even more exciting than the terrific returns, to me anyway, is the remarkable stability of the approach. Generally we think of relative-strength based approaches as being more volatile and subject to big downturns in weak markets. On the other hand, we consider the Dow Dividend Approach to be stable in weak markets.

Yet if you compare the returns in the two weakest years over the last dozen (the recession in 1990 and the relatively flat market in 1994), the Keystone model was decidedly superior to the Dow Dividend Approach. In 1990, for example, the Keystone 5 lost all of 0.3% and the Keystone 10 lost only 1.0%. Yet in 1990, the High Yield 10 lost 10.0% and the Beating the Dow 5 lost 17.3%. (The Standard & Poor's 500 Index lost 3.2%.)

And in 1994, while the S&P 500 gained a negligible 1.6%, the High Yield 10 gained 2.4% and the Beating the Dow 5 gained 6.3%. Keystone, however, did considerably better. The 10-stock version gained 11.3% and the five-stock version gained 9.0%.

Year-to-date (through February 25), here's a list of the 30 stocks for 1998 and their returns.

 
  -2.22  Fifth Third Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %> 
  -6.15  Coca-Cola Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %> 
  29.63  Gap (The)  Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> 
   6.92  AirTouch Communic. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %> 
 -14.27  Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> 
  20.35  Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> 
  54.69  Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> 
  18.80  Pfizer  Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> 
   4.32  Norwest Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOB)") else Response.Write("(NYSE: NOB)") end if %> 
  11.46  Safeway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %> 
   9.64  Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> 
   3.94  Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> 
  -8.31  Schlumberger Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> 
  13.06  Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %> 
  22.55  Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> 
   0.71  Medtronic  Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDT)") else Response.Write("(NYSE: MDT)") end if %> 
  14.90  Dayton Hudson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> 
   7.21  Tyco Int'l Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TYC)") else Response.Write("(NYSE: TYC)") end if %> 
   2.92  Allstate Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALL)") else Response.Write("(NYSE: ALL)") end if %> 
  17.34  Walgreen Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAG)") else Response.Write("(NYSE: WAG)") end if %> 
  14.16  Freddie Mac <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %> 
  20.92  Wal-Mart Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> 
   3.61  Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> 
   0.21  Merrill Lynch & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> 
  19.73  Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> 
  37.30  MBNA Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KRB)") else Response.Write("(NYSE: KRB)") end if %> 
   6.66  BankAmerica Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> 
  16.46  Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> 
  31.43  Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> 
  20.30  Xerox Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> 
  
   7.59  S&P 500 Index 
   2.78  Top 5 
  12.35  Top 10 
  10.96  Top 15 
  10.37  Top 20 
  10.64  Top 25 
  12.61  Top 30

Fool on!

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