Thursday, March 05, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (March 5, 1998) -- Of our five new "Dozens" portfolios, let's feature the one putting on the best show so far in 1998 -- the Formula90 Dozen.

The concept behind the Dozens portfolios is that an investor can build a twelve-stock portfolio using a favorite screening strategy by adding a new stock every month from the top of the rankings. Then after the portfolio contains twelve stocks, the investor begins replacing the original holdings (one per month) as each stock grows to be a year (and a day) old.

The advantages to such a plan are several. First, holding twelve stocks gives you a fair measure of diversity, but in spreading out the buying dates, you're choosing the highest-ranking stock each month. Theoretically, you get twelve top-ranked stocks, as opposed to dipping twelve spots down the rankings list as you would if you were to fill all twelve positions on a single day. This should boost the model's returns.

Second, commissions are still limited to 24 trades per year (one sale and one purchase each month), and capital gains taxes are capped at the medium rate of 28% (or less if you're in the 15% tax bracket).

And third, with a transaction scheduled each month, you can add new money regularly and put it to work right away without running up extra trading costs.

Let's look, then, at how it's been working in the first quarter for the Formula90 Dozen. (Just to jog your memory, Formula90 is essentially a relative strength strategy, choosing the stocks from our Workshop database with the highest RS ranking in Investor's Business Daily but imposing a minimum EPS ranking from IBD of 90.)

At the end of December, the stock we began with was Safeskin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %>. With the original $1,000, we were able to purchase (hypothetically -- these are only paper models) 17 shares at $56.75, plus an $8 commission. That investment is roughly 5.3% higher this afternoon.

At the end of January, we added another $1,000 and picked up 10 shares of Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> at $99.4375. Even with today's sell-off in technology stocks, the investment is ahead by better than 32% in just over one month. This is the real reason the Formula90 Dozen is off to such a great start in 1998.

And at the end of February, the third stock added was United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USTR)") else Response.Write("(Nasdaq: USTR)") end if %>. We picked up 16 shares at $59.875. And after just a few days, it's roughly where it began.

So after investing $1,000 each on the last day of December, January and February ($3,000 total), the portfolio value at 3:00 today was $3,341.25. Calculating an annualized return after little more than two months is somewhat misleading, but the portfolio's currently performing on a pace to earn 203% for the year. Don't hold your breath, though -- the Standard & Poor's 500 would record gains of 47% if it continues its pace for the whole year and even the most bullish of forecasters doesn't see us at 1,425 on the S&P 500 in 1998. So be prepared for these annualized returns to swing wildly with every tick of the stocks' prices until the portfolios are considerably closer to being a full year old.

Nevertheless, the Formula90 Dozen is off to a much-better-than-the-market pace in 1998, chiefly the result of Dell's enormous gain in February. We'll keep watching.

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.]