Wednesday, March 25, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (March 25, 1998) -- Despite today's flip-flop market, there's something to marvel at in our Workshop models this year. Let's look at the Dozens model absolutely smoking the first-quarter returns -- The Formula90 Dozen.

First, let me bring you up to speed if you're unfamiliar with either Formula90 or the Dozens concept. Our Formula90 screen starts with the top 100 stocks in the Value Line ranking system and then filters out any stocks with less than a 90 percentile score for both EPS (earning per share) and RS (relative strength) in the Investor's Business Daily stock tables. The remaining stocks are sorted by highest RS scores.

The Dozens portfolio buys the highest-ranking Formula90 stock each month that's not already in the portfolio. Then as each stock grows to be a year old in the portfolio, it's replaced by the current highest-ranking stock not already in the portfolio. It's a great system for those investors who want twelve stocks but add money regularly. This way you still get the same diversity as buying them all at once, but you're able to add new money every month and you're only picking the very best stock each month.

We started a model portfolio on 12/31/97 with this approach and the first purchase with our hypothetical $1,000 was Safeskin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %>. The stock is currently trading 24.3% higher than our cost (which includes an $8 commission).

The next $1,000 was added on January 30 and the portfolio picked up Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>. Over the last seven and a half weeks, Dell has climbed 35.6% over our cost.

The most recent purchase was United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USTR)") else Response.Write("(Nasdaq: USTR)") end if %>, which we added on February 27. In the last four weeks (less two days), our third acquisition has already gained 6.3%.

In dollar terms, then, we've invested $3,000 -- a grand each on the final trading day of December, January, and February. Right now, the portfolio's worth $3,619.75.

Here's how I calculate the returns for the portfolio. Calculating a simple percentage change between the $3,000 we plunked down and the current value of $3,619.75 understates the actual growth rate because the money was deposited on different dates, so each $1,000 has been at work for a different length of time.

Turning to the XIRR function in Microsoft Excel, we can calculate an annualized return for the portfolio of 243.0%. That means that if the portfolio were to continue compounding over the remaining 281 days of 1998 as it has for the first 84, the return would be 243%.

This early in the year, of course, such annualized gains mean little. (Heck, the Standard & Poor's 500 is on a pace to record a 73.8% gain if the 84 days to date are any indication. Don't expect it to continue, Fools.)

One way to get a better idea of what that annualized rate amounts to is to extrapolate the annual return into a year-to-date return. Working with a 365-day year, we can get a daily compounded return of 0.33825855%. Then, by compounding that daily rate of growth for the 84 days we've already closed the books on in 1998, we get a year-to-date equivalent rate of 32.8%. By way of comparison, the S&P 500 rate year-to-date is 13.6%.

In simple terms, the Formula90 Dozens portfolio is slam-dunking the market through the first quarter. Long way to go, though, and nine more stocks to add along the way. Stay tuned as we pick up stock #4 at the close next Tuesday. Fool on!

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database

[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.]