Monday, May 18, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (May 18, 1998) -- It's time to feature a model we don't talk about a great deal in the Workshop, but perhaps ought to -- the Formula90 approach (specifically the Dozens version, today).

The Formula90 model begins with the 100 top-ranked stocks in the Value Line Investment Survey, then filters out any of those stocks with EPS (earnings per share) scores in Investor's Business Daily of less than 90. That means the model only allows stocks with earnings growth in the top ten percent of all stocks.

Then the model selects the stocks in that group with the best RS (relative strength) percentile scores (also from Investor's Business Daily). While not always necessary, if I must break a tie, I use the EPS score.

This is a fairly aggressive growth model that has posted impressive returns in the past using a one-year holding period. In the Dozens incarnation, of course, only one stock is selected each month (all are still held one year), so that by the end of the first year, a full portfolio of twelve stocks is established. The approach can be used alone (very aggressive), or combined with one or more additional screens to flesh out the twelve spots if you'd like a more balanced strategy.

Our pure Formula90 Dozen model is currently setting a pace to achieve an annual return this year of 119.0% (versus the Standard & Poor's 500's annualized pace of 39.4%). Translating this to a year-to-date equivalent, we'd have a return of 34.5%.

Of the five stocks in the portfolio so far (#6 will be added at the close on the last trading day of the month), only Ethan Allen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %> has been a loser, down 18.4% since being added at the end of March.

The first selection (end of December) was Safeskin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %>, which is up 24.1% so far. The big winner is the stock from the end of January, Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>, up 85.8% since.

Two modest winners sandwich Ethan Allen. At the end of February, the model picked up United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USTR)") else Response.Write("(Nasdaq: USTR)") end if %>, now up 3.4%. And the most recent addition, just 18 days old, is Capital One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %>, which is already up 3.8% in a somewhat shaky market climate.

Let me reiterate, however, that these models can be very misleading the first year. With less than a full slate of stocks, and evaluated over only a few months, the annualized returns can be very volatile. Any significant jump in even a single stock can have a tremendous impact on the overall returns at this stage, so don't put too much weight into the numbers you see here. As these Dozens models get to be more than a year old we'll be able to see their real performance in a better light. 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.]