Friday, May 22, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (May 22, 1998) -- The question was asked today on the America Online version of the Workshop message board whether one can profitably "cherry pick" stocks from among the Keystone rankings instead of buying them strictly based on the rankings.

So let me start by talking about the history we have under our belt with Keystone. We have a history for this model dating back to the beginning of 1986, and of course, the Value Line rankings which underpin the model date back to 1965. (Keep in mind that Value Line's record has been tracked in real time; it's not just a back-testing phenomenon.)

In the twelve and one-third years we have data for the thirty-stock Keystone rankings, the entire group of thirty stocks has outperformed the Standard & Poor's 500 Index consistently. The annualized returns for the index since 1986 have been 17.8% while the entire field of Keystone stocks has recorded annualized gains of 21.2%. (By comparison, the Dow High-Yield Ten has returned 19.3% and the Beating the Dow Five, 19.4%.)

There is, of course, an increase in average returns the higher one draws from the Keystone rankings. For example, annualized returns for the top twenty go up to 23.6%. The top ten have returned 26.7%. And the top five, 29.2%.

But if you wish to rely on something other than the straight Keystone rankings, there's no reason why you can't narrow the field of thirty stocks based on your own research as well as the relative strength test the mechanical model employs. You may decide that you need to diversify among industries, or you may be mixing in some other ratios with those already in the model. The choice is yours.

In fact, the Foolish Founders would encourage you to lay your independent research on top of the screen to make your choices. It's comforting to know, however, that even following the ten-stock model blindly, you'd have outpaced the S&P 500 Index in ten of the last twelve years (and would be leading in 1998 as well).

In other words, it's a very stable strategy, which with individualized research may even be improved upon. Of course, if you discover that cherry picking your stocks loses to the straight screen over time, you can always fall back on the mechanical rankings. Make the screen your own.

Have a Foolish holiday weekend.

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.]