Fool.com: The BSP 30 vs. the Dow 30 (Workshop) November 18, 1998

<FOOLISH WORKSHOP>

The BSP 30 vs.
the Dow 30

Baltimore, MD (November 18, 1998) -- Last week we reviewed the ground rules for choosing the Beating the S&P (BSP) stocks and listed the thirty BSP stocks for the year. Let's keep in mind that a prime goal of the BSP strategy was to find a group of diversified, large companies with characteristics similar to those of the Dow 30. Well, how'd we do?

To answer this question, let's look at some fundamental characteristics of the BSP 30 stocks and compare them to those of the Dow 30. The data I'm using for this comparison are those obtained from the same Business Week listing we used to choose the BSP 30 stocks.

                     BSP 30  Dow 30  S&P   
Market Cap (billions)    48      53   13
Stock Price              67      69   51
Price to Earnings Ratio  24      21   24
Dividend Yield (%)     1.30    1.48 1.67

Note that values shown for the BSP and Dow groups represent medians. For the Standard & Poor's group, the median values were not available. Instead, I took the averages that had been calculated for each of the industry groupings and found the median value for each characteristic.

So what can we conclude?

First, the market capitalizations of the BSP 30 and Dow 30 are similar, although the Dow 30 may have a small edge here. There's nothing we can do about that -- Dow Jones & Company get first dibs, and size is one of their top priorities. BSP makes up for it a bit in that we annually make substitutions to select the largest available stocks. Since replacements are relatively rare in the Dow 30, when a stock from the Dow is on a downward course, it often stays in the index a good while. Note also that stocks from both the BSP and the Dow are about four times larger than the average S&P stock.

The average stock prices of the BSP and Dow stocks are similar and are higher than the average price of stocks in the S&P. The price difference between the BSP/Dow stocks and the S&P stocks likely reflects the larger size of the companies, since smaller companies tend to maintain lower stock prices.

The price to earnings ratios (P/E) of the BSP and Dow stocks are similar and comparable to that of the S&P. The P/Es of the these stocks, compared to those of the S&P, are likely to fluctuate depending on prevailing investor sentiment for large, multinational companies versus their smaller brethren.

The dividend yield of the BSP stocks appears to be slightly lower than that of the Dow stocks. This finding may have something to do with the relative paucity of technology stocks (which tend to pay smaller dividends) among the Dow 30. It's uncertain whether this small absolute difference (0.18%) has any significant effect on performance. Also, we're not sure if the difference observed this particular year is representative of a general trend throughout the BSP history.

What about diversity? The thirty BSP stocks cover 15 industry sectors (of 24 sectors overall), compared to 16 for the Dow stocks. That seems pretty comparable. Within these sector groups, there does appear to be some increased concentration in the BSP stocks compared with the Dow. For instance, for the BSP stocks there are six sectors that contain the maximum three stocks, compared with only two sectors in the Dow 30 that contain three stocks.

We could have improved the diversity of the BSP stocks by altering the ground rules to choose only two from each industry sector, but we would have had to make significant sacrifices in the size department. The development of investment screens, much like life itself, is a series of trade-offs. In this case, company size was chosen as a more important factor than diversity. Keep in mind that size is a critical factor to success in high yield investing.

In general, at least for this year, we seemed to have made out fairly well in our goal of choosing 30 stocks that mimic the Dow. Sure, there may be some differences between the two groups. Whether these relatively small disparities contribute to meaningful differences in future returns (or risk) is anyone's guess.

Going back to last week's column, there seems to be a bit of confusion among some readers about the list of current BSP 30 stocks. Many were puzzled why two stocks, Anheuser Busch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %> and Texaco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TX)") else Response.Write("(NYSE: TX)") end if %>, were listed as belonging to the 1998 BSP Portfolio but weren't included on the list of the BSP 30 stocks. The apparent discrepancy stems from the fact that as of January 2, 1998, both these stocks were indeed members of the BSP 30, but they did not qualify for the new BSP 30 when the latest Business Week list was published in March 1998. Hope that clears things up.

******

Beating the S&P year to date returns (as of 11-17-98):

Anheuser Busch         +34.0%
Emerson Electric       +15.3%
Ford                   +56.8%
Kimberly-Clark          +1.4%
Texaco                 +10.3%

Beating the S&P        +23.6%
S&P 500                +17.4%

Compound Annual Growth Rate from 1-2-87:
Beating the S&P        +20.6%
S&P 500                +17.1%

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