The Motley Fool: The Foolish Workshop, Tuesday, April 28, 1998

Tuesday, April 28, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (April 28, 1998) -- It took roughly sixteen weeks to accomplish, but as of April 22, the Keystone models for 1998 are all finally leading the Standard & Poor's 500 Index. Now let's hope the momentum for this large-cap growth strategy continues to pull away from the market averages.

The Keystone Approach is a relative strength approach, but one that focuses specifically on the largest American stocks. By limiting the field size to the biggest companies, a Keystone investor may be able to reduce some of the volatility associated with more aggressive growth strategies.

For those of you unfamiliar with the screening process, Keystone starts with the 400 stocks ranked either #1 or #2 for timeliness in the Value Line Investment Survey, eliminates foreign companies, and then selects the thirty with the biggest market caps. That's it.

Within that field of thirty, though, Keystone ranks the stocks by their 26-week total returns (relative strength). In the twelve and one-quarter years of data I've compiled for the strategy, choosing the stocks with the best relative strength performances over the previous six months has greatly increased the returns over the overall group of thirty stocks. And yet, even the thirty-stock field has consistently out-performed the S&P 500 Index, something more than 80% of stock mutual fund managers can't claim over the last decade. (A lot of critics will claim that the returns for such a model are irrelevant because it's been a bull market for the last decade, but mutual fund managers were investing in the same bull market and their returns are still sub-par. Where's the beef?)

From January 1, 1986 through April 22, 1998, the S&P 500 Index (total returns) has compounded at an annual rate of 18.0%. The High-Yield 10 Dow Approach has returned 19.5%. And the five-stock Beating the Dow approach has gained 19.4%.

Yet during that same stretch, the Keystone 30 has returned 21.2%. Each more concentrated sub-set of the Keystone field has returned an even higher rate of return, to the most concentrated version (with just five stocks), which has returned an impressive 29.4% a year. The ten-stock version returned 26.4%. In the entire history, the Keystone 5 only lagged the S&P 500 one time, in 1988, when it gained 8.5% and the S&P 500 Index gained 16.8%.

This year's top five group started off roughly, even though the overall field of thirty stocks was outpacing the market index. Recently, however, the power of the high relative strength stocks has reasserted itself and the Keystone five are once again leading the index.

Through April 22, here's how the top ten stocks have fared:

 5.3%  Fifth Third Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %> 
 14.0%  Coca-Cola Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %> 
 31.4%  The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> 
 26.3%  AirTouch Communication <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %> 
 13.9%  Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> 
  0.9%  Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> 
 84.4%  Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> 
 54.1%  Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> 
  6.9%  Norwest Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOB)") else Response.Write("(NYSE: NOB)") end if %> 
 15.4%  Safeway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %> 
  
 18.2%  Top 5 
 25.3%  Top 10 
 19.3%  Top 15 
 17.9%  Top 20 
 18.7%  Top 25 
 20.5%  All 30 
  
 16.8%  S&P 500

Even with Cendant's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> 46% drop recently, the groups below the top 10 (Cendant is #11 in the January 1998 list) are still beating the market, which shows the consistency of the ranking system overall and the protection of spreading risk across fifteen or twenty positions. One weak performer won't do in a good strategy overall.

So while it's still a long way to the end of this, our thirteenth year of data for the Keystone Growth model, it's starting to shape up as yet another market outperforming year for the approach. Keep watching with us. It should be fun. Fool on!

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

[Robert Sheard is the author of The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and soon at your local bookseller.]