The Workshop Toolbox

by Paul Larson
( [email protected])

Chicago, IL. (Sept. 16, 1998) -- One thing I have noticed when poking around the workshop is that some tools are used very often, while others seem to lie around and collect dust. One does not have to look around too much to see that two of the most commonly used inputs into many of the mechanical models here are dividend yield and absolute price. While there are thousands of ways to screen for stocks using just these two pieces of information, there is also a world of other potential factors for which investors can screen stocks.

I'm sure that one of the reasons dividend and price are used in many mechanical models is that the data is retrieved extremely easily. It's the type of data that even what Benjamin Graham would call "defensive" investors can get and use with little effort. For those who are wondering, Graham defines defensive investors as those who do not have the time to devote to researching stocks, not those who are bearish on the market.

In any case, the dividend yield and the absolute price data of any group of stocks are readily available, and many of the models that use these inputs, such as the Foolish Four, are not difficult to understand. The high popularity of these various models is not surprising given their ease to comprehend and implement.

Another one of the tools I see being used heavily around the workshop is the Value Line Investment Survey's timeliness and industry rankings. All the models listed in the screen explanations page here in the workshop, such as Keystone and Unemotional Growth, use the Value Line Investment Survey in one way or another. Every single one of them.

While many of these screens have impressive historical returns, I imagine that some of the new screens that are concocted here in the future will not be dependent on this sole publication. There are simply far too many other possible pieces of data that can be used in screens that it seems awfully silly to depend on this one publication alone. I say this not to knock Value Line or the screens themselves, rather just as an idea of where the workshop may be going down the road. Diversification is a healthy thing.

Yet another set of data that gets good wear here in the workshop is the Relative Strength and EPS percentile scores from Investor's Business Daily. Relative Strength seems to this Fool to be more a technical piece of information than anything, and I'm surprised to find it used in as many screens as it is. The EPS percentile scores, on the other hand, rank the relative earnings growth of any given company and are certainly rooted more towards ranking fundamental performance. The Unemotional Growth, Relative Strength-IBD, and Formula 90 screens all use information from IBD in one way or another.

One set of data published here that does not seem to get used very often in models is the rising and falling margin screens. Although I have noticed that Louis Corrigan has done a nice job attempting to use these screens for potential winners in his columns of the past few weeks. The missed and beaten estimates screens also seem not to carry much weight in many of the models published, but this is definitely a set of data that can be used down the road.

The margins and estimates pages are just two examples of pieces of data that can potentially be used to screen stocks mechanically. Any multitude and combination of fundamental data is fair game for a potential screen. If it's a line item and can be standardized across companies, it is a prospective data input.

I don't expect whoever takes over the reins here to completely forsake both IBD and Value Line as sources of data down the road, but I do suspect that some of the newer models that pop up in the coming months will use a different starting set of stocks to screen and will probably not use timeliness rankings. With so many other potential metrics to use, and the vast amount of "land" that has yet to be mined for winning combinations of data to screen, it's only logical that some of the new "discoveries" may involve screening for things you and I haven't even dreamed of. Yet.

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