The Motley Fool: The Foolish Workshop, Friday, June 12, 1998

Friday, June 12, 1998

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (June 12, 1998) -- If you're familiar with the Keystone Growth strategy, you know that it's a momentum model (both earnings and growth) focusing on the largest of American corporations. It's been a remarkably powerful and consistent approach through the last twelve and a half years.

But several readers have recently wondered how expanding the field of stocks to more than thirty companies would affect the results of the screen. While I haven't tested every possible combination of number of stocks, or market capitalization, I have tested a number of such groups, only to find some big inconsistency in the returns. One year will blow Keystone away; the next the challenger will fall apart.

The particular variation suggested to me most recently is to keep the screen in place where we accept only those stocks carrying a timeliness ranking in Value Line of 1 or 2, but then instead of limiting the field to the thirty largest stocks, include any stock with a market capitalization of at least $5 billion.

Performing this screen at the beginning of 1998 generated a list of 78 American companies. If we rank them by their previous six-month total returns, the following list of twenty topped the rankings. They're listed with their 1998 year-to-date returns (through June 10).

20.10 US Airways Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %>
12.03 Coca-Cola Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %>
23.01 AirTouch Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %>
-15.17 Charles Schwab <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %>
17.60 Southwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %>
25.39 AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %>
4.13 Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>
-38.55 Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %>
-6.64 Fifth Third Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %>
41.20 Equitable Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EQ)") else Response.Write("(NYSE: EQ)") end if %>
76.73 The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>
34.17 Costco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %>
-8.58 MGIC Investment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTG)") else Response.Write("(NYSE: MTG)") end if %>
-0.67 Northern Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTRS)") else Response.Write("(Nasdaq: NTRS)") end if %>
31.82 HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBOC)") else Response.Write("(Nasdaq: HBOC)") end if %>
99.26 Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>
17.43 Cardinal Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAH)") else Response.Write("(NYSE: CAH)") end if %>
40.13 Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>
47.36 Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %>
5.26 Guidant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDT)") else Response.Write("(NYSE: GDT)") end if %>

21.30 Average Return

This group is actually skewed by one week from our December 31 rankings. I only have the January 7 rankings available for this brief test, but nevertheless, virtually all of the big winners on this group were also Keystone stocks, so I don't see any big advantage creeping in by lowering the market-cap bar to let in smaller companies. Granted, it's a single comparison, and only a partial year, but the fuller comparisons I've tested also trailed the Keystone returns since 1986.

I think a very aggressive approach like one of our pure Relative Strength approaches may out-pace Keystone over the long haul, but it will do so accompanied by a higher volatility. I don't think trying to split the difference is the best way to go, however. The steadiness of Keystone is one attraction, and the high-octane power of pure Relative Strength is another. Trying to bring them together in the middle is likely to weaken both of those attractions in my opinion. Have a Foolish 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.]