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As we make the annual change, we bid fond adieu to our best-performing companies. These stocks usually are disqualified from next year's list. Their stock price has increased, and consequently the dividend yield has decreased (dividend yield representing the annualized dividend divided by the stock price). The RP ratio (which equals the yield divided by the square root of the stock price) has also declined, assuming the company hasn't increased the yield substantially to offset the increase in stock price. Minnesota Mining <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> and Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> are two recent examples of such stocks whose price increases knocked them off of our downtrodden stocks list.
When we renew our portfolios, we often keep a stock or two from the previous year. Often we groan when we see what companies remain, since they're likely to be among our poorest performers. These stocks may have dropped in price, or their price might not have appreciated as much as that of their cohorts. These companies' prospects often seem grim. Our enthusiasm for buying them ranks just below that of many periodontal procedures. Do we have to live with them for a whole year -- again?
For Foolish Four investors, Caterpillar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> is one such company that remains on most lists this year. Despite an early rise last winter, a 24% price drop at the end of last year brought this heavy equipment manufacturer's return for the year down to 4% compared with a return of almost 20% for the S&P 500. JP Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> did better, returning 22%, but also increased its dividend which was enough to keep it on the Foolish Four list. Our renewal BSP stocks didn't fair so well. Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> and Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> lost about 13% and 6%, respectively.
About this same time last year, we examined the fate of Beating the S&P stocks that remained on the list a second year. We noted that 25 BSP stocks had been renewed since 1987, the earliest date for which BSP data are available. As a group, these stocks actually performed about the same as the S&P 500 the first year on the list, although they didn't do nearly as well as our average BSP stock that year.
Although these BSP "repeat offenders" posted mediocre results the first year they were on the list, they did quite well the second year. Of these 25 stocks, 72% outperformed the S&P 500 that second year. As a group, these companies beat the S&P 500 by almost 9 percentage points.
Can our observations for these BSP-repeaters be generalized to the Foolish Four universe of Dow companies? Let's take a gander.
The Foolish Four data now includes 39 years, extending back to 1961. That's the year Eisenhower delivered his farewell address, Bob Dylan played his first gig in New York, and I was potty-trained. A momentous year, to be sure. But I digress.
These 39 years of Foolish Four data give us 38 FF portfolios that have been renewed at the start of the year. That's 152 Foolish Four stocks in all, or 38 years times 4 stocks in each portfolio. Of these 152 stocks, it turns out that 56 stocks, or 37%, were renewed for another year. Stated another way, on average only about 2.5 of the 4 Foolish Four stocks are new to the portfolio each year.
How did these 56 repeat offenders fare the first year they appeared on the Foolish Four list? It turns out they performed about the same, or slightly better than, the market. Of these 56 stocks, exactly half, or 28, outperformed the S&P 500, while (uh-duh!) the other half underperformed. That first year, our FF repeaters returned on average 1.7% more than the comparative S&P 500 return for that year, and 1.3% higher than that of the average Dow stock.
Compared with their Foolish Four peers, though, the returns of our FF repeaters left much to be desired that first year. Only 19 of 56 stocks, or 34%, outperformed the average return for the Foolish Four that year. Despite slightly outperforming the S&P 500, these 56 stocks underperformed the other stocks in the FF portfolio by 7.0%.
So, Foolish Four stocks that remain on the list for a second year are mediocre performers, compared with market averages. They certainly haven't kept pace with their Foolish Four peers that leave the list. These findings closely parallel those of our BSP universe of stocks. It's comforting to me that we've found yet another instance of data in one subset of stocks (BSP) being confirmed in another subset, the Foolish Four.
The findings shouldn't come as too much of a surprise, given what we know about how our FF and BSP stocks are chosen. It's reassuring to see that our repeat offenders, among our worst stocks, actually held their own with the market averages in that first year.
Even more interesting data emerge when we look at how these Foolish Four repeaters performed the second year they made the list. Will our experience with the BSP stocks, namely that the repeaters did very well the next year, be confirmed? If you own stock in Caterpillar, JP Morgan, Ford, or Bank of America, (or are just plain curious), tune in next week.
Beating the S&P year-to-date returns
(as of 01-11-00):
Bank One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %> -6.3%
PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> +4.3%
Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> -2.1%
Bank of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> -8.3%
Fannie Mae <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> -5.2%
Beating the S&P -3.5%
Standard & Poor's 500 Index -2.1%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +23.9%
S&P 500 +17.7%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $162,000
S&P 500 $84,300