Friday, January 2, 1998


Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (Jan. 2, 1997) -- What a way to start 1998. And I'm not talking about the drop AT&T (NYSE: T) experienced the first day it leaves our model portfolio or the big jump the new Foolish Four stocks made.

What I'm really talking about is the confusion over Wednesday's closing rankings and the list of yields we are using to choose our 1998 Foolish Four model. Let me review the process we're now using and then explain how and where I confused the issue Wednesday night.

We start with the top ten yielding Dow stocks and then sort them by share price. If the cheapest stock of the ten doesn't also carry the highest dividend yield, we simply choose the four cheapest stocks and buy them in equal-dollar amounts for the next year. (This new version of the Foolish Four is what we have been following under the name Unemotional Value.)

The confusion came in when DuPont (NYSE: DD) and Union Carbide (NYSE: UK) ended 1997 with virtually identical yields in the tenth and eleventh spots on the yield list. To be completely technical about it, DuPont had a slightly higher yield than Union Carbide after Wednesday's closing bell, but you'd have to carry the yield calculation out to at least three places after the decimal to find the difference. Most investors get their yield information from published sources that will not put such a fine point on this calculation.

In a more practical version of the yields, then, rounding them off to no more than two places past the decimal, the yields for DuPont and Union Carbide are essentially identical. And in the case of a tie for the final spot, Beating the Dow rules have you include the stock with the lower share price -- in this case Union Carbide.

So while one could make a reasonable case to include either stock as the tenth stock on the list, it's more consistent with the kind of information available in newspapers and online to consider the yields tied and include Union Carbide instead of DuPont as the final high-yield stock. Unfortunately Wednesday I didn't notice the essential tie when I sorted the yields in Excel (which carries the calculation all the way out).

Using the practical yield system means the Foolish Four for our 1998 paper model will be Union Carbide, International Paper (NYSE: IP), Philip Morris (NYSE: MO), and Eastman Kodak (NYSE: EK). Keep in mind, however, with these yields so closely bunched together, the rankings can change daily until a gap between these yields settles in. With today's big jump by Union Carbide and Kodak, and AT&T's slide, the rankings have changed significantly again. If you ever want to see the raw numbers, though, and look at the details yourself (which we recommend strongly), check out our Current Dow Order file, which is updated every evening.

The real point I want to bring up here is that these rankings are not that precise and there's no way to say one stock with a 2.10% yield is better than another with an identical yield. (Not to mention that they're also both chemical companies.) So don't get bent out of shape if you like DuPont better than Union Carbide, or your rankings a day earlier or a day later point to a slightly different group of four. In the short run, there's no tightly predictable pattern of stock behavior on which you can rely.

On to a little celebrating for 1997's results, then. How about that AT&T? What started off looking like a weak year all the way around will ultimately go down in the record books as a winning campaign. The old Foolish Four (remember that we've adopted a new variation of the Foolish Four for 1998 -- no doubled positions with the Unemotional Value approach) ended 1997 with a 28% profit, beating the Dow Jones Industrial Average and Nasdaq Composite, but trailing the S&P 500 by three percentage points.

After similar fine results in 1995 and 1996, are we pushing our luck and should we cap the champagne quickly and run for cover? Perhaps, but we don't believe in such timing efforts. And, in fact, we see the Foolish Four as something of a defensive/offensive approach. During weak markets, this approach often holds up remarkably well because it selects stocks that may have already been smashed a bit (Eastman Kodak this year?), so they have less room to fall in a general sell-off. And when they do recover, these stocks have the most potential for capital appreciation. So stick with the idea of remaining fully invested and rely on the strategy for your best defense. Fool on!

Stock  Change   Last 
 UK   +1  1/16  44.00 
 IP   +2  1/16  45.19 
 MO   ---       45.25 
 EK   +3  5/16  63.88 
                    Day   Month    Year 
         FOOL-4   +3.18%   3.18%   3.18% 
         DJIA     +0.72%   0.72%   0.72% 
         S&P 500  +0.48%   0.48%   0.48% 
         NASDAQ   +0.71%   0.71%   0.71% 
     Rec'd   #  Security     In At       Now    Change 
    1/2/98  206 Eastman Ko    60.56     63.88     5.47% 
    1/2/98  289 Int'l Pape    43.13     45.19     4.78% 
    1/2/98  291 Union Carb    42.94     44.00     2.47% 
    1/2/98  276 Philip Mor    45.25     45.25     0.00% 
     Rec'd   #  Security     In At     Value    Change 
    1/2/98  206 Eastman Ko 12475.88  13158.25   $682.38 
    1/2/98  289 Int'l Pape 12463.13  13059.19   $596.06 
    1/2/98  291 Union Carb 12494.81  12804.00   $309.19 
    1/2/98  276 Philip Mor 12489.00  12489.00     $0.00 
                              CASH     $77.19 
                             TOTAL  $51587.63