Workshop Portfolio

Wednesday, December 31, 1997

The Daily Workshop Report
by Robert Sheard (TMF Sheard)

LEXINGTON, KY. (Dec. 31, 1997) -- Today is an anniversary of sorts for the Workshop, the close of our first year, in fact. And by my reckoning, it's been a good year. We've discussed a wide range of topics, some promising, some frightening, many in-between. But all of us involved during the year have learned -- the real goal here.

So it's with equal anticipation that I look forward to the start of our second year. We'll be making some changes in the Workshop in the near future, including changes in the screens we follow "officially." So for those of you looking into this area for the first time, or only having found us recently, I'd like to give a summary of the eight screens we'll be tracking for 1998. Each Friday, I'll be posting new rankings for these screens, updating our weekly database for those of you who like to test your own theories, and maintaining a total return comparison for the eight screens and the stocks within each.

We'll be following all eight screens using an annual holding period so that we get legitimate comparisons. But since the Unemotional Growth and original Investing for Growth models were tested on shorter holding cycles when I developed them, I'll feature those approaches in my columns frequently to keep you posted on how the shorter-cycle versions of those two models are doing as well.

I'll also be posting a permanent version of the following summaries in the Workshop soon, so that you can refer to the procedures at any time. The eight models we will be tracking in the Foolish Workshop are derived using the following procedures:

Keystone: Starting with all of the American stocks ranked either 1 or 2 for Timeliness in the Value Line Investment Survey, narrow the field to the 30 stocks with the largest market capitalizations. Of those thirty chose the ten stocks (or five) with the highest total returns over the previous 26 weeks. From 1986 through 1997, the 10-stock version of this strategy has returned an annualized 25%. The five-stock version has returned 28%.

Unemotional Growth: Starting with all of the stocks ranked 1 for Timeliness in the Value Line Investment Survey, select the ten (or five) with the highest EPS (earnings per share) percentile score in Investor's Business Daily. When it becomes necessary to break a tie, use the RS (relative strength) percentile score in Investor's Business Daily. This model has not been tested using an annual holding period. Using a monthly adjustment, however, it has returned 39% a year for a five-stock portfolio from 1987 through 1996. A ten-stock version has returned 30% a year on that same monthly cycle.

Investing for Growth - Classic: Starting with the stocks listed on page 39 of Value Line's Summary & Index (High Growth Stocks), narrow the field to only those stocks that are ranked 1 for Timeliness. Select the ten with the best (lowest) Value Line Industry Rankings. When it becomes necessary to break a tie, turn first to Value Line's Estimated Growth rate, and second to the Historical Growth rate. All necessary data are included on page 39 of the Summary & Index. This model has not been tested using an annual holding period. Using a quarterly cycle, however, it has returned 24% a year from 1980 through 1997.

Investing for Growth - Relative Strength: The field of stocks is identical to the Classic IFG model. But instead of sorting the stocks by Industry Ranking, sort them by the previous 26-Week Total Return. Then select the best ten (or five). This model has not been tested.

Relative Strength - IBD: Starting with all of the stocks ranked 1 for Timeliness in the Value Line Investment Survey, select the ten (or five) with the highest RS (relative strength) percentile score in Investor's Business Daily. When it becomes necessary to break a tie, use the EPS (earnings per share) percentile score in Investor's Business Daily. This model has not been tested.

Relative Strength - 26 Week: Starting with all of the stocks ranked 1 for Timeliness in the Value Line Investment Survey, select the ten (or five) with the highest Total Return over the previous 26 weeks. This model has not been tested.

Formula 90: Starting with all of the stocks ranked 1 for Timeliness in the Value Line Investment Survey, select the ten (or five) with the highest RS (relative strength) percentile score in Investor's Business Daily, provided the stocks also carry an EPS (earnings per share) percentile score in Investor's Business Daily of at least 90. Since 1987, the ten-stock variation of this model has returned 34% a year while the five-stock version has returned 33%. These impressive returns have been accompanied by very high inter-year volatility, however.

Low Price/Sales: Starting with all of the stocks ranked 1 for Timeliness in the Value Line Investment Survey, reduce the field to those stocks that have Price/Sales ratios of less than 1.5. Then further reduce the field by including only those stocks with positive 12-month EPS growth. From the remaining stocks, select the ten (or five) with the highest returns over the previous 26 weeks. This specific model has not been tested, but it's a derivation of Jim O'Shaughnessy's very successful Cornerstone Growth approach.

Have a Foolishly Happy New Year!

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