A growth stock strategy developed in the Foolish Workshop as an analog of the Foolish Four has been doing extremely well this year. The Keystone 100 is up around 50% year-to-date, although results depend on when you started the strategy.
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Portfolio Started Friday, February 18
Waiting and buying the current stocks turned out to be a better choice, because this was the week that Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> dropped off the list, and Qualcomm has been a disaster this year. But, that doesn't mean that waiting is necessarily the best idea. The difference between starting one week versus another is always going to plague us. There's just no way to pick the optimum time. I like the Nike approach -- Just do it. Differences due to the luck of the draw will iron themselves out over a period of several years. Not that anyone who started on February 17 should be complaining.
(Quick review: Growth stock earnings are increasing or are expected to increase rapidly. Growth in share price is expected because earnings are expected to increase rapidly. Value refers to companies selling for less than their intrinsic value. Growth in share price for value stocks is driven by the market recognizing that the company is undervalued. The price rises as the company becomes correctly valued by the market.)
The Keystone 100 is a mechanical strategy that starts with the 400 companies that are rated best for Timeliness by Value Line. Those 400 companies are ranked by size, and the 100 largest companies are selected. The top 100 companies are ranked by recent price appreciation, and the companies with the highest price appreciation over the previous six months are selected. The strategy usually works best if those five stocks are held for one year.
Where the Foolish Four uses membership in the Dow as its base criteria -- assuring that the stocks picked are large, financially powerful companies -- the Key100 accomplishes the same thing using the Value Line Timeliness ranking and taking only the largest 100 stocks. The Foolish Four's second criteria, high yield combined with low price, ferrets our undervalued companies. Key100's second criteria, recent price appreciation (also known as Relative Strength), selects stocks that are appreciating rapidly in price.
I just said that growth stocks are those whose earnings are growing. Price growth does not necessarily equate with earnings growth, at least not in the short term. Lots of companies' prices go through the roof before they earn their first dollar.
That's where Value Line's Timeliness ranking comes in. Recent earnings, the long-term earnings trend, and earnings surprises are all major factors in the Timeliness rating. So, all those overnight wonders you read about that zoom up on rumors and collapse a few months later don't usually make the Value Line list. That's why we use it. It prescreens for companies experiencing real growth.
So far this year, the Keystone 100 stocks are up 55.24%. Not bad for a flat market. But, let's get strict. I didn't mention the Keystone strategy in the space until February 16, so let's see how the strategy has done since then. I looked at it two ways. February 16 was a Wednesday. So, you could have bought the stocks listed on the previous Friday or waited until the next Friday afternoon to buy from a more current list. Both portfolios are listed below.
Portfolio Started Thursday, February 17
Feb. 17
Sept. 1
Return
NTAP
$87.19
$115.50
32%
SDLI
$162.13
$401.13
147%
JDSU
$106.56
$123.81
16%
SEBL
$116.81
$195.69
68%
QCOM
$130.00
$59.25
-54%
Average Return
42%
Feb. 18
Sept. 1
Return
NTAP
$83.63
$115.50
38%
SDLI
$164.94
$401.13
143%
JDSU
$103.06
$123.81
20%
SEBL
$114.56
$195.69
71%
PMCS
$152.06
$245.00
61%
Average Return
67%
Yep, this has definitely been a growth-stock year.
Fool on and prosper!