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Beating The
S&P
Beating the S&P is a screen developed by Ethan Haskel (MF Cormend) to
extend the Beating the Dow method beyond the 30 Dow Jones Industrials. It
essentially applies the same criteria (high yield, low price) to the 30 largest
American industrial stocks not already included in the Dow in order to get
another field of stocks from which to choose.
In MF Cormend's own words, here's how the approach works:
Let me first say that I love the Beating the Dow strategy and invest in it.
It's incredibly simple, has a proven track record, and even leaves me time
to play with my kids now and then. It gives me a foundation portfolio of
large-cap stocks that not only can outperform when the bulls are running,
but won't get trampled when those bears come clawing.
But can we BTD investors do better? And why do I ask?
I have some concerns when my work associates, mail carrier, and even my great
Aunt Millie start investing in Beating the Dow. The heart of BTD theory is
its contrarian nature, which says to buy the "Dogs of the Dow" just when
they're becoming bargains, as indicated by their high yields and low prices.
If Aunt Millie and multimillion dollar Unit Investment Trusts offered by
most of the big brokerages are doing it, then these bargain stocks might
not get quite so low, and thus might not soar quite so high. Maybe, just
maybe, another universe of large-cap companies could provide a suitable
alternative for the next millennium.
We don't have to look far. It's relatively easy to find the largest capitalized
companies in America, and numerous stock screens are available to help. What
if, once a year, we compile a list of these large companies? From that list
we'd toss out the Dow 30 stocks, toss out the utilities (almost always
high-yielders, and not traditionally in the Dow 30), and ignore those companies
not paying dividends. Then, to assure diversity, we'd take only the three
highest-cap stocks from any one industry. For example, we throw out the
fourth-largest oil stock and the fourth-largest drug stock.
Finally, we'd take the 30 highest-capitalized, dividend-paying stocks on
the list and rank them by yield and price, just like Beating the Dow does.
In other words, we'd choose the 10 stocks with the highest yield, rank them
in ascending order by stock price, throw out the cheapest, and buy the next
four or five
Voila! We've got Beating the S&P. X
While Beating the S&P only has a ten-year track record, it's held up
well. From 1987 through 1996, the BSP five-stock approach compounded at an
annual rate of 18.7%.
Instructions to generate current rankings:
1. Start with the Business Week 1000, which ranks the 1000 largest American
companies by market capitalization.
2. Skipping utility stocks and components of the Dow Jones Industrial Average,
take the top 30 stocks. (We skip the utilities because this approach works
best with industrial stocks. We skip the Dow Jones stocks because they're
covered by the other Dow strategies.)
3. Of those thirty stocks, identify the ten with the highest dividend yields.
If there is a tie for the final spot among the ten, break it by choosing
the stock with the lower current price.
4. Sort the ten stocks in ascending order by current price. That is, the
cheapest of the ten is #1.
5. Eliminate the stock with the lowest current price. In the past, this stock
has typically under-performed the rest of the group.
6. Choose the next five with the lowest prices. If there's a tie for the
final spot, give preference to the stock with the higher yield.
7. Hold for one year.
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