Fool.com: RS Dozen Still Soaring (Workshop) August 12, 1998

RS Dozen Still Soaring

by Robert Sheard
(TMF Sheard)

LEXINGTON, KY. (August 12, 1998) -- And we have a total blowout! After roughly two-thirds of 1998's race among the seven Dozens models, one model is so far out in front, the other six may be despairing of their chances. Nevertheless, three other models would be proud of their performance if it weren't for our leader's pace.

Before I get to the specifics, let me reprise the Dozens method for new or occasional readers. The Dozens model adds a single stock each month, eventually holding twelve stocks at any one time. As each position grows a year old, it's replaced by the highest-ranking stock in whichever screen one is using, so long as that stock is not already in the portfolio (no duplicate holdings).

The reason for using the Dozens model rather than buying a batch of stocks all at once and forgetting them for a year is twofold. First, if one's a regular saver, this method provides twelve windows a year to add new money without running up additional trading costs. Second, by spreading the choices out one per month, one typically chooses stocks from higher in the rankings than if the entire portfolio were selected at once, thus theoretically generating better returns.

Let's see how it's worked so far this year. Our benchmark is a portfolio in the Standard & Poor's 500 Index Spyder <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>, where $1,000 is added at the closing bell on the final trading day of each month. So far, we've made eight such purchases (starting on 12/31/97). Because of the recent sell-off, however, the annualized return for the benchmark portfolio has dropped to just 1.0%. That is, if the portfolio finished the year at this pace, it would record a gain for the year of just 1.0%. (None of the returns reported here accounts for dividends.)

Three of our seven models are doing even worse, however. Hanging in last place is the Low Price/Sales Dozen, with an annualized loss so far of 18.9%. Barely ahead of it is the Dow Racers Dozen, which chooses the Dow stock each month with the best relative strength. The Dow Racers are on an annualized pace to lose 16.5%. And finally, the remaining Dow Dozen, which uses the Foolish Four rankings, is on a pace to lose 1.3% this year.

That's the bad news. The good news is very, very good. The Formula90 Dozen has an annualized gain of 57.2% for the year. The Keystone Dozen has an annualized gain of 64.4%. And the 26-Week Relative Strength Dozen has an annualized gain of 67.2%.

And finally, the exceptional news. The IBD Relative Strength Dozen has an enormous annualized gain year to date, a massive 169.6%. It's perhaps counterintuitive, but the strongest relative strength stocks have held up surprisingly well in the recent correction, keeping this momentum portfolio rolling. Let's look at the individual holdings in the portfolio.

 
 12/31  Best Buy Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %>             176.0% 
 01/30  Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>         113.5% 
 02/27  Safeskin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %>               24.5% 
 03/31  Ethan Allen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %>              -29.3% 
 04/30  Capital One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %>     18.0% 
 05/29  America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>            30.8% 
 06/30  The Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>                    5.3% 
 07/31  Nokia ADR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %>               -9.9%

It's probably too early for any significant conclusions, but I'm leaning toward throwing in the towel on the Dow Racers. I see no point in limiting the field to 30 stocks when using a Relative Strength model, especially in light of the consistent performance by Keystone over the last 13 years. And I'm not enamored of the weak performance for the Price/Sales model. As I have for the last couple of years, I continue to lean towards the various relative strength models as the best performers, apparently even in weaker patches for the market -- as I pointed out in yesterday's column about the Keystone history. We'll keep watching.

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

[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]