Fool.com: What's That Smell? (Workshop) January 13, 1999

<FOOLISH WORKSHOP>

What's That Smell?

Baltimore, MD (Jan. 13, 1999) -- We've closed the books on a pretty darn good 1998 for The Beating the S&P (BSP) Portfolio. The turn of the calendar brings with it a little excitement here at BSP central, as we choose new horses for The Official 1999 Portfolio. Keep in mind that the BSP 30 stocks won't change until March. What does change is the stocks we'll follow for our Official Portfolio, assuming that we've made equal dollar purchases in each of five stocks, based on closing prices at the end of 1998. The returns are all hypothetical, since this is not a real money portfolio.

Based on the dividend yield and stock price data on January 4, 1999, below are the six lowest-priced stocks of the 10 highest yielders, taken from this year's BSP 30. I've also listed the 1998 return for each stock, ignoring dividends. The stocks are listed in ascending order, from the lowest-priced to the highest. Remember that the lowest-priced stock, Sara Lee this year, is not included in The Official Portfolio.

Sara Lee  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %>                +0.2%
Schlumberger  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>           -42.4%
Kimberly-Clark  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:  KMB)") else Response.Write("(NYSE:  KMB)") end if %>        +10.5%
Campbell Soup  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:  CPB)") else Response.Write("(NYSE:  CPB)") end if %>          -1.1%
Ford   <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>                    +66.6%
BankAmerica  <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>             -1.1%

1998 average return for all six stocks        +5.5%
S&P 500 Depositary Receipts  <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SPY)") else Response.Write("(AMEX: SPY)") end if %>     +27.0%

No doubt about it, our "Dogs of the S&P" for 1999 sure stunk up the place last year!

But, hey, we're used to this. Flash back to January 1998, and we find that our newly chosen stocks for 1998 averaged a return of +16.3% for the previous year, compared to the S&P's return of +31.4%. Again, Ford was the only hero for the prior year, returning 50.6% in 1997. Without Ford, the other five stocks gained only a measly 9.4%. Pee-Yoo! Despite these past results, last year's team of "losers" managed to beat the S&P 500 again in 1998.

So what exactly are we getting ourselves into with our "pathetic" handful of 1999 BSP Portfolio stocks? We own five companies with a total market capitalization of 276 billion dollars, 829,000 employees worldwide, and combined sales of 210 billion dollars last year. They are either the largest, or second largest, American corporations in the field of banking, food services, automobiles, consumer paper products, and oil services. The five BSP stocks' dividend yield averages 2.2%, about double that of the S&P 500. The average price-earnings (P/E) ratio for the BSP stocks is 25, compared with 35 for the S&P 500.

I could be wrong (and someone please correct me if I am!), but I believe it was Mark Twain who once said something like, "History may not always repeat itself, but it usually rhymes." Let's hope that there's enough poetry left in these dogs to make 1999 another stellar year.

On a related topic, a number of readers have questioned how Ford, a powerhouse performer over the past few years, again managed to make it into our "Dogs" portfolio for 1999. In 1994, Ford split two-to-one, giving it a low price relative to the other BSP stocks. Despite this low price, by the beginning of 1998 it had almost climbed out of The BSP Portfolio. This April the company spun off Associates First Capital <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFS)") else Response.Write("(NYSE: AFS)") end if %>, which overnight caused Ford's stock price to decrease by over $20. (This transaction didn't directly affect the overall worth of a Ford shareholder's portfolio, since now the investor held shares in Associates.) With Ford's continued tremendous price appreciation, again it is making efforts to climb out of the BSP "dog house." Most Ford shareholders wouldn't mind in the least if it did!

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Postscript:

A while back, in an article entitled "On the Proper Use of Lampposts," I suggested that:

"The capacity for independent, logical thought is one of the most important traits for a successful investor. My undergraduate philosophy course, with its emphasis on the analytic process, has served me well time and again in this regard. Unfortunately, I suspect that's one subject you'll not find in most MBA course catalogs."

This Sunday's New York Times has a fascinating article (www.nytimes.com), called "To Beat the Market, Hire a Philosopher." The story profiles William H. Miller III, probably the most successful mutual fund manager of the decade. It details his rise as a doctorate student in the philosophy department at Johns Hopkins University and how his study of William James and Jorge Luis Borges helped him achieve his remarkable investment returns. Don't miss it.

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Beating the S&P year to date returns (as of 01-12-99):

Schlumberger        +10.0%
Kimberly-Clark       -5.4%
Campbell Soup       -18.0%
Ford                 +7.1%
BankAmerica         +11.3%

Beating the S&P      +1.0%
S&P 500              +0.8%

Compound Annual Growth
Rate from 1-2-87:

Beating the S&P     +20.8%
S&P 500             +17.8%

$10,000 invested on
1-2-87 now equals:

Beating the S&P    $96,400   
S&P 500            $71,300

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