The Motley Fool: The Foolish Workshop, December 4, 1998

<FOOLISH WORKSHOP>

"Beta Testing"

by David Forrest ([email protected])

Pensacola, FL (December 4, 1998) -- Back in early September I penned a report asking people to consider a new type of screen. If you recall, I had been saying that any new screens we introduce should have some rationale behind them. I then introduced the Beta screen. Beta is a measure of how volatile a stock is relative to something else, like the Standard & Poor's 500 Index. Those stocks with high betas are expected to do better than the market when the market is up and worse than the market when the market is down. It's that simple. The higher the beta, the larger the swings. At least that's the theory.

So, I decided to do an informal test of the theory. My rationale (and we always need to understand why a screen works) was that stocks go up over time. It makes sense, then, to own those stocks with high betas to be able to do better than the market. I further refined the screen to include Value Line's Timeliness 1 stocks. Why? Value Line's Timeliness 1 stocks have crushed the market returns on aggregate for several decades. I thought that restricting myself to a list of awesome performers and choosing the more volatile among them would be a great way to capture fat returns.

I started the mock portfolio using the Fool's new portfolio tracking technology on September 9. I took the Timeliness 1 stocks, sorted by beta, and chose the Top 10 stocks. They were:

1. Network Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETA)") else Response.Write("(Nasdaq: NETA)") end if %>
2. Symantec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMC)") else Response.Write("(Nasdaq: SYMC)") end if %>
3. Willams Sonoma <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WSM)") else Response.Write("(NYSE: WSM)") end if %>
4. America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>
5. Just For Feet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FEET)") else Response.Write("(NYSE: FEET)") end if %>
6. Solectron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %>
7. Vitesse Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VTSS)") else Response.Write("(Nasdaq: VTSS)") end if %>
8. Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %>
9. Fore Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORE)") else Response.Write("(Nasdaq: FORE)") end if %>
10 CKE Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %>

When the market got hammered in October, the Beta portfolio got slammed much harder, down more than 15% while the market was only down 7% or so at the time. With the market rallying so strongly since then, the Beta portfolio has risen remarkably, as one would expect. All together, from inception, the Beta portfolio has risen 31.34% versus the S&P 500's rise of 13.88%.

Is a new screen born? The jury is still out. A few months strong performance do not a valid screen make. Still, I believe the rationale underpinning the screen to be solid and we'll see how things go from here. If you're interested, here are the most current stocks that would fit in the Beta portfolio:

1. Network Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETA)") else Response.Write("(Nasdaq: NETA)") end if %>
2. Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>
3. Williams Sonoma <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WSM)") else Response.Write("(NYSE: WSM)") end if %>
4. Vitesse Semiconductor (Nasdaq: VTSS
5. Solectron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %>
6. Nokia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %>
7. Just For Feet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FEET)") else Response.Write("(Nasdaq: FEET)") end if %>
8. America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>
9. Sterling Commerce <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SE)") else Response.Write("(NYSE: SE)") end if %>
10. Staples <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLS)") else Response.Write("(Nasdaq: SPLS)") end if %>

Take care.

Bogey

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