<FOOLISH WORKSHOP>

Unemotional Growth      

by Jim Stevens ([email protected])

Burlington, VT (May 13, 1999) -- Today we look at a Workshop mechanical model mainstay, Unemotional Growth, UG for short. The Unemotional Growth screen stands as one of the Workshop's earliest mechanical models. Just like the Foolish Four provides a simple way to pick value stocks, UG takes the emotion and a lot of the effort out of selecting a basket of growth stocks that have historically had superior returns.

The Dow models, like the Foolish Four, start with the thirty Dow stocks. The UG starts with the 100 stocks Value Line ranks #1 for Timeliness. The computers and people at Value Line stay up nights checking out megabytes of data, and these are the 100 companies they predict will do best over the next six to twelve months.

They've got a pretty good track record at picking likely stocks. Following their weekly updates and owning all 100 stocks hypothetically would have returned a market-crushing 20.94% compounded annually from 1965 through 1997. But who can buy 100 stocks? How might we pick the ones that have potential to beat the Value Line?

Peter Lynch and countless other investment icons tout earnings growth as the unstoppable force behind lip-smacking returns in the market, so UG limits our selection to the 5 or 10 companies have the fastest earnings growth.

Lucky for us, Investor's Business Daily publishes a handy ranking for each company's earnings growth performance relative to other stocks. Each company is scored on a percentile basis from 1 to 99. A score of 99 means the stock has had better earnings growth than 99% of the stocks studied. The UG model narrows that list of 100 stocks down to the 5 or 10 stocks with the highest EPS score.

The originator of the screen, Robert Sheard, suggests reviewing the stock picks monthly and replacing any stock that no longer qualifies with a new one. We track the UG two ways: as a monthly portfolio, with returns reported on the UG history page, and as an annual portfolio, where we simply buy the stocks at the beginning of the year and hold them for 12 months. This year's results are reported on the Workshop Returns page.

One thing that UG investors must contend with is month-over-month share price volatility that is like a ride on the mother of all roller-coasters. After a couple of good months, just when you think you've discovered investment nirvana, you dial up your portfolio to find you've lost 15% in a week! The model is not for weak stomachs and most definitely not suitable for a complete investment portfolio.

Even though the nearly 13-year track record for UG5 boasts a stunning 34.18% compound annual growth rate, there have been some cataclysmic meltdowns along the way. Look no further then last month, when the unfortunate inclusion of Network Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETA)") else Response.Write("(Nasdaq: NETA)") end if %> almost singlehandedly sank the UG5 a disappointing 11.24% for April 1999 -- ouch!

The UG5 monthly model is bombing in 1999. It had a flat return in 1997 and a 1998 that took until December for its returns to squirt out in front of the Standard & Poor's 500 Index for the year. Some Fools seem to have disregarded UG as "no longer working." I'm no prognosticator, so I can only make the observation that the overall average track record for the model remains fantastic. I don't know of any "sea change" in the last few years that suddenly rendered the basic premise of the screen no longer useful.

Whichever flavor of Workshop investment model suits you, I think it always helps to remember that we remain at our unemotional best when we focus on returns over decades rather than over years or months.

Stay Foolish!