Tuesday, May 5, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (May 5, 1998) -- For those fans of Jim O'Shaughnessy's most recent book, How to Retire Rich, today's column is for you. One of the strategies Jim focuses on in the book is called Reasonable Runaways, a variation of the Cornerstone Growth model he laid out in What Works on Wall Street and which is used in his mutual fund of the same name.

The theory behind the Reasonable Runaways is that you're buying stocks at a discount, paying less than a dollar for each dollar's worth of sales, but getting them while they're on the rise. The primary factors involved are a low Price to Sales Ratio and strong Relative Price Performance. In the Reasonable Runaways incarnation of this strategy, Jim insists on three screening factors:

A Market Capitalization of at least $150 million (to screen out highly illiquid stocks)

A Price-to-Sales Ratio of less than one (buying the company for less than the company's revenues)

The best relative strength (total return) over the past year.

Screening the Value Line database of some 1,700 stocks, over 500 companies passed the market cap and price/sales tests. Sorting them by one-year returns gives us a top-ten list including the following stocks:

Best Buy Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %>
Navistar Int'l <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NAV)") else Response.Write("(NYSE: NAV)") end if %>
Lennar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEN)") else Response.Write("(NYSE: LEN)") end if %>
United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USTR)") else Response.Write("(Nasdaq: USTR)") end if %>
Unisys Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UIS)") else Response.Write("(NYSE: UIS)") end if %>
US Airways Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %>
Varlen Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRLN)") else Response.Write("(Nasdaq: VRLN)") end if %>
NACCO Inds. 'A' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NC)") else Response.Write("(NYSE: NC)") end if %>
Michael Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MIKL)") else Response.Write("(Nasdaq: MIKL)") end if %>
Lehman Bros. Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %>

As many of you have read here recently, for stocks held one year, I prefer a relative strength (or total return) test of 6 months rather than one year. A Journal of Finance study covering 1965 - 1989 found that a 26-week test performed somewhat better than a full year's total return in terms of picking the better performers over the succeeding year.

Using the same screen for Jim's Reasonable Runaways but switching to a 26-week relative strength filter gives us the following rankings:

Best Buy Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %>
J.B. Hunt <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBHT)") else Response.Write("(Nasdaq: JBHT)") end if %>
Lukens Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUC)") else Response.Write("(NYSE: LUC)") end if %>
Good Guys <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GGUY)") else Response.Write("(Nasdaq: GGUY)") end if %>
Haverty Furniture <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HAVT)") else Response.Write("(Nasdaq: HAVT)") end if %>
Station Casinos <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STN)") else Response.Write("(NYSE: STN)") end if %>
LADD Furniture <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LADF)") else Response.Write("(Nasdaq: LADF)") end if %>
Alaska Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %>
NACCO Inds. 'A' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NC)") else Response.Write("(NYSE: NC)") end if %>
Lennar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEN)") else Response.Write("(NYSE: LEN)") end if %>

Keep in mind that the Value Line database is a limited field. Using a screening database with a much larger field of stocks will turn up a different list.

Tomorrow, TMF Cheeze will be sitting in for me here in the Workshop. I'll be away doing a series of radio interviews for The Unemotional Investor -- but I'll be back on Thursday. Until then, Fool on!

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

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