Monday, April 06, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (April 6, 1998) -- It's an absolutely stunning day here in the Bluegrass, so you'll forgive me, I'm sure, if my thoughts wander from stocks a bit today. In fact, as soon as this column is submitted, I'm out the door with my son to fly his new gliders. (Hey, it beats listening to the bears predicting yet another crash all afternoon!)

And speaking of high flyers, let's get "up close and personal" with the Relative Strength Dozen model today. This thing makes the Concorde look like a puddle jumper so far in 1998.

For those of you unclear on the whole Dozens concept, it's a way to build a portfolio of 12 stocks using whatever screen, or combination of screens, you like the best. Each month, you buy (or update) one stock, holding each one for a full year (a year and a day in taxable accounts). The theory is that by spreading out your purchases, you're pulling stocks from higher in the rankings (because the rankings change throughout the year), thus boosting your long-term returns over buying the entire group of stocks at one time.

In addition, you're getting the diversity of a 12-stock portfolio over four or five stocks and trading costs and taxes are still under control. And if you frequently add new money to your portfolio from regular savings, this gives you twelve opportunities each year to do so without increasing costs or wondering where to invest subsequent deposits.

The Relative Strength version of the Dozens portfolio uses the Value Line top-ranked stocks, sorted by 26-week total returns, to choose its components. We assume an additional $1,000 is added each month for the new purchase.

At the start of the year, the top-ranked stock was Best Buy Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %>. In fact, Best Buy has remained the top-ranked stock every week so far in 1998. The model, however, doesn't repeat stocks, so in February, March, and April, the model dipped down the rankings to the next stock on the list wasn't already a part of the portfolio. The model portfolio picked up 26 shares of BBY at $36.875 (plus an $8 commission). With Best Buy now at $70.8125, the position has gained 90.4%.

At the beginning of February, the new stock added was Ethan Allen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %>. We picked up 21 shares at $47.875, now worth $63.50, a gain after the commission of 31.6%.

In March, the portfolio added 18 shares of Alaska Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> at $55.0625. Now worth $56.00 a share, the position has gained only 0.9% so far.

Added just last week, the fourth stock in the model portfolio was Whole Food Markets <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WFMI)") else Response.Write("(Nasdaq: WFMI)") end if %>, acquired at $69.75. Having slipped to $66.4375, this position is down 5.5% right off the bat.

Overall, though, the portfolio is on fire with the extraordinary rise in Best Buy and the impressive gains for Ethan Allen. A total of $4,000 has been invested ($1,000 each month), and the current value of the portfolio is $5,149.

To calculate the return, resist the temptation just to measure the percentage gain from $4,000 to $5,149. That ignores the different time horizons for each $1,000 addition and undervalues the actual growth rate of the portfolio as a whole. Instead, I calculate an annualized return for the whole portfolio using Microsoft Excel's XIRR function. (You'll get an identical result using either Quicken or Microsoft Money.)

The annualized return right now for the Relative Strength Dozen model is a mammoth 449.7%. What that means is that if the same compounded growth rate were to occur throughout the rest of the year, the portfolio would more than quintuple. (Psst... don't hold your breath!) By way of comparison, the Standard & Poor's 500's annualized rate now is 73.3% -- still an awesome first quarter, but hardly sustainable.

To get a more meaningful figure, we can take that annualized return and get a daily compounded rate equivalent. If we assume a 365-day calculation, the compounded daily growth rate for the Relative Strength portfolio has been 0.46799649%. Compound that daily rate for the 96 days we've concluded so far in 1998 and we're left with a total return equivalent so far of 56.55% for the model portfolio. Say thanks to Best Buy being the first and best stock in the group!

By way of comparison, the year-to-date equivalent for the S&P 500 Index is 15.56%. Tomorrow, we'll look at two more Dozens portfolios. Now, to that glider! 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.]