Workshop Portfolio

Ground Rules for Beating the S&P

by Ethan Haskel (Cormend@aol.com)

Baltimore, MD (November 11, 1998) -- Last week we discussed some basic guidelines for writing the rules by which a screening system chooses the actual stocks for investing. I'd like to now delineate the specific rules for choosing the stocks comprising the Beating the S&P (BSP) Portfolio.

Remember, the goal of choosing BSP stocks is to find a universe of very large companies that mimics the Dow Jones Industrial Average of thirty stocks. Once the thirty BSP stocks are found, the screens of yield and price can be applied to the BSP 30 just as they would be applied to the Dow 30.

Business Week publishes annually a list of the largest U.S. companies. The title of the list and format have changed slightly over the years, but recently it has been published each March. Currently titled "The Top Companies of the S&P 500," the list records the market capitalization, sector, and current yield of all the stocks that are important to us.

How to find the BSP stocks:

  1. Using the Business Week listings, make a list of the stocks that have the highest capitalizations (called "market value" in the listing). List the stocks in order from highest market value down to the lowest. Taking the top 75 stocks or so should be enough to give you the final BSP 30 stocks.

  2. Exclude the following stocks (just cross them off the list, or exclude them from the list initially): a) Stocks that are currently in the Dow 30
    b) Stocks that are not listed as paying a dividend
    c) Stocks that are listed as a utility, or telecommunications stocks listed as telephone companies by Standard and Poor's.*

  3. After the appropriate exclusions, the top stocks on the list are prime candidates for the BSP 30 stocks. To achieve diversity, one final step must be taken. Only the three largest stocks belonging to any one sector (defined right there in the list) can be accepted. After three stocks from any one sector are included, the fourth (or fifth, etc.) highest capitalized stock in the same sector cannot be used.

  4. Continue down the list until you obtain thirty stocks meeting all the criteria. These are the BSP 30 stocks for the year. They won't change until the next annual Business Week issue.

    To continue now, a smaller list of BSP stocks must be chosen from the BSP 30. These will comprise the BSP Portfolio. Depending on market conditions, these stocks may change daily due solely to the current stock price and dividend yield.

  5. Analogous to the manner of choosing the Beating the Dow stocks, take the BSP 30 stocks and list them in dividend yield order from highest to lowest. Any newspaper or online quote system will serve this purpose, although the Wall Street Journal was used for official backtesting. The top 10 high yielding stocks of the BSP 30 are called the BSP 10, or the "Dogs of the S&P."

  6. Take the BSP 10 stocks and list them in increasing price order, from lowest-priced stock to highest. The lowest-priced BSP 10 stock on the list has been a large underperformer in general and currently is not used. The next five least expensive stocks comprise the BSP Portfolio stocks.

  7. Just as you would for the Beating the Dow strategy, invest equal dollar amounts in the five BSP stocks. Invest for a year (and a day, if capital gains are a consideration). On the anniversary date, rebalance the portfolio by selling the stocks that are not on the current list and buying those stocks that appear on the new list. The details for this transaction are described elsewherefor Beating the Dow.

So there you have the guidelines for choosing the BSP stocks!

[* Note that the "Baby Bells," formed from the breakup of AT&T, currently are listed in Business Week as telecommunications companies. They formerly were listed under utilities and likely are not candidates for the Dow 30. Unlike AT&T (NYSE: T) or Lucent Technologies (NYSE: LU), for instance, companies such as Bell South (NYSE: BLS) and SBC Communications (NYSE: SBC) are designated as telephone companies by Standard and Poor's, and thus are excluded from the BSP 30.]

Putting our own rules into action, the following are the current BSP 30 stocks. They will remain on this list until March.

American International Group (NYSE: AIG)
Amoco (NYSE: AN)
BankAmerica (NYSE: BAC)
Bristol-Myers-Squibb (NYSE: BMY)
Campbell Soup (NYSE: CPB)
Chase Manhattan (NYSE: CMB)
Citigroup (NYSE: CCI)
Compaq Computer
(NYSE: CPQ)
Eli Lilly (NYSE: LLY)
Emerson Electric (NYSE: EMR)
Fannie Mae (NYSE: FNM)
Ford Motor (NYSE: F)
Gillette (NYSE: G)
Home Depot (NYSE: HD)
Intel (Nasdaq: INTC)
Kimberly-Clark (NYSE: KMB)
Lucent Technologies (NYSE: LU)
MCI WorldCom (Nasdaq: WCOM)
Mobil (NYSE: MOB)
Monsanto (NYSE: MTC)
Morgan Stanley Dean Witter (NYSE: MWD)
Motorola (NYSE: MOT)
Pepsico (NYSE: PEP)
Pfizer (NYSE: PFE)
Sara Lee (NYSE: SLE)
Schlumberger (NYSE: SLB)
Sprint (NYSE: FON)
Time Warner (NYSE: TWX)
Tyco International (NYSE: TYC)
Xerox (NYSE: XRX)

*******

Beating the S&P year to date returns (as of 11-10-98):

  
 Anheuser Busch         +32.0% 
 Emerson Electric       +16.7% 
 Ford                   +52.6% 
 Kimberly-Clark          +1.9% 
 Texaco                 +10.0% 
      
 Beating the S&P        +22.7% 
 S&P 500                +14.5% 
      
 Compound Annual Growth Rate from 1-2-87: 
      
 Beating the S&P        +20.5% 
 S&P 500                +17.0%

Check out the latest file updates for the Workshop:
New Rankings | 1998 Returns | New Database