Thursday, March 19, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (March 19, 1998) -- Beginning in January, I started building a real-time database for my Keystone model, starting a new group of stocks at the beginning of each month. The idea is to make sure the seasonality of the approach is not a factor. In other words, if you begin in June are you going to get roughly equal long-term results to those achieved by someone who starts in January?

I don't see any logical reason why a date on the calendar would make a difference to this approach, but it's something worth watching. Plus, in the future it may give us something to refer to if we want to test another idea.

The following table represents the returns of the first three monthly groups of Keystone stocks from 1998. The returns measure price appreciation only (up until a few minutes before today's closing bell). Many of these stocks pay dividends, of course, and that will boost the returns, but for the sake of this test, I can't justify the extra time to track down all the dividend information for each of the thirty stocks in every monthly group. What we really want to know we'll learn from the capital appreciation, and that's whether the approach beats the market handily throughout the year.

         Jan.    Feb.    Mar. 
 S&P 500  12.2%   11.1%   3.8% 
                 
 Top 5     8.3%   13.0%   2.2% 
 Top 10   12.4%    9.9%   2.5% 
 Top 15   12.5%   11.6%   3.3% 
 Top 20   13.0%   11.2%   3.3% 
 Top 25   13.4%   11.1%   3.8% 
 Top 30   15.2%   10.7%   2.4% 
 

It's early in the year, of course, so any conclusions based on this data are pure speculation, but as I've seen in the past, the most striking fact isn't the raw numbers themselves, but their relative consistency. For the most part, with an occasional exception, the stocks perform remarkably well throughout the rankings. Over the long haul, however (our history goes back twelve years so far -- more to come soon), the returns do generally improve the nearer the top of the rankings one goes.

An interesting development seems to be occurring in the Top 5 group from January. For much of this first quarter, three of the top five stocks were actually in the red and the usually top-performing segment was dramatically under-performing the rest of the field of thirty. Recently, though, all three early losers have begun to rise and two of the three have pulled back into the black, helping this top group catch up to the pack. The remaining loser, Coca-Cola Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %>, is only down by 2% and recovering along with Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> lately. Again, there's a long time before next January 1, and anything can happen. Fool on!

[Robert Sheard is the author of the forthcoming book, The Unemotional Investor, due out from Simon & Schuster on May 12. To pre-order your copy, please visit Amazon.com, where it's available at a discounted price.]