The Motley Fool: The Foolish Workshop, Feb. 4, 1999

<FOOLISH WORKSHOP>

Plowback Update

Burlington, VT (Feb. 4, 1999) -- Well, I've checked in on two of the experimental screens I began tracking at the beginning of 1999, now for the third and last. Tonight it's the Plowback Ratio screen. It's been said that Warren Buffett is a fan of this measure of a company's use of earned cash. During the year or so we've been keeping an eye on it the screen has picked some great companies.

To bring new readers up to date, let me explain what the "plowback ratio" is and how the Workshop's Plowback Ratio screen works. Plowback ratio is one of the company balance sheet parameters that's tracked by Value Line, and they define it as "net profit less dividends divided by common equity including tangible assets, expressed as a percentage." Basically, it's the percent return on equity, but it doesn't count dividends as return.

The idea is that if a company is running a nice wide profit margin, continues to see enough expansion potential in its franchise, and has enough new ideas to keep building a bigger and bigger business, the future is bright.

To pick the high plowback stocks I am tracking, I used the following method: Starting with all 1700 stocks in the Value Line Investment Survey, select the 20 stocks with the largest market capitalization that also sport a plowback ratio of 25% or greater.

Here are the twenty that made the cut at the beginning of this year, along with how they've fared so far in 1999. They are listed in descending order of 26-week total return as of 12/31/98.

Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>   29.05%
Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>       40.87%
Int'l Business Mach. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>  -4.95%
Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>        16.97%
Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>      47.40%
Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %>              22.12%
Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>      19.73%
Safeway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>          -8.21%
Guidant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDT)") else Response.Write("(NYSE: GDT)") end if %>         -2.73%
Gap (The)  Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>       19.27%
Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>     0.06%
Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>    20.28%
Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %>       -2.26%
Abbott Labs. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %>          -4.85%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>        -20.00%
Sara Lee Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %>       -12.86%
Bestfoods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BFO)") else Response.Write("(NYSE: BFO)") end if %>             -7.75%
Caterpillar Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>      -6.25%
Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>              -3.73%
Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>    20.09%
                      Top 5       25.87%
                      Top 10      17.95%
                      Top 15      11.52%
                      All Twenty   8.11%

Well, well not a bad start at all! Remember this is an untested screen, so don't read too much into this short burst. Use this list to compare to your favorite screen performance, or maybe to key into certain companies that you'd like to study further.

Interesting that this screen is doing great and it doesn't even have any requirement for the stocks to be on Value Line's favored #1 or #2 lists. Sorry, Value Line analysts, you are unnecessary here.

Although the screen is awash with high tech outfits, it is not a narrow sector play to begin with. It found at least two non-tech companies that are trouncing the market so far this year, so you can't attribute all of its recent blip of success to the technology weighting.

I usually put up the most up-to-date plowback picks here, but Value Line's download page was broken when I tried it a few times. Below are the plowback screen stocks from the last Value Line edition I had downloaded, which was January 20, 1999. The stock list is amazingly static, so I wouldn't expect it's much different than a newer one. As usual, the stocks are listed in descending order of 26-week total return.

Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>  115.32%
Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>       96.14%
Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>        67.96%
Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>      61.61%
Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %>              58.95%
Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>      55.91%
Int'l Business Mach. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>  53.1%
Gap (The)  Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>       41.9%
Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>    39.29%
Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>    22.9%
Safeway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>          21.79%
Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>    14.89%
Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %>        9.83%
Abbott Labs. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %>           5.73%
Sara Lee Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %>        -5.76%
Tellabs  Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %>      -5.9%
British Amer Tobacco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTI)") else Response.Write("(NYSE: BTI)") end if %>  -9.45%
Caterpillar Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %>     -11.57%
Campbell Soup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>        -18.86%
Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>             -24.03%

Fool on!

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