Patience is a Virtue
by Ethan Haskel ([email protected])
Baltimore, MD (Feb. 3, 1999) -- Henry Wheeler Shaw said, "My son, observe the postage stamp! Its usefulness depends on its ability to stick to one thing until it gets there."
As many readers of this column are aware, the Beating the S&P (BSP) strategy invests in large-cap stocks that are generally beaten down, hoping for an ultimate turnaround. Sometimes it seems downright frustrating waiting for some of our "Dogs of the S&P" to right themselves. Some stocks stay on our BSP list for what seems like an eternity, while we wait... and wait... and continue to wait for their recovery. Kimberly-Clark (NYSE: KMB) is a good example from this year's list, returning only 12.6% last year compared to the gain by the Standard and Poor's 500 Index of about 28%.
Let's look a little more closely at the fate of these "BSP repeaters" -- the BSP stocks that stay on the list for a second, or even a third, year. How do they fare?
Since our database goes back to 1987, and we're looking at the repeating stocks, we have 11 years of returns available for analysis. Of the 55 stocks for these 11 years (five per year), 25 stocks made it on to the list for two consecutive periods. Thus the annual turnover rate for BSP stocks is 55%.
As a group, these 25 BSP repeaters pretty much kept pace with the market the first year they appeared on the BSP list, gaining 13.6% on average compared to the S&P 500's gain of 14.3%. Since the average BSP stock outperforms the S&P 500, these stocks did underperform the typical BSP stock the first year they made the list.
What about the second year? Of these 25 BSP repeaters, 18 (72%) outperformed the S&P 500 the following year. The average return for these repeaters was +25.5%, versus +16.9% for the S&P 500. Only two of these stocks lost money that year. Thus, the repeaters seem to have a very good year, even better than the average BSP stock.
Is there a difference in repeater performance for the second year, depending on how the stock did the first year in the BSP? In other words, how do the repeating losers perform, compared to the repeaters that did well the first year? There doesn't seem to be a major difference here. Of the 25 repeating stocks, 11 underperformed the S&P 500 the first year on the BSP list, while 14 outperformed the benchmark. The second year brought a return of +24.4% for the 11 underperformers, versus +26.3% for the 14 outperformers (compared to 16.9% for the S&P comparisons for each group), likely not a significant difference.
What about a stock that did a "three-peat," or remained on the list for a third consecutive year? There were 12 of these stocks in the BSP database. These stocks tended to do extraordinarily well in the third year, returning +28.6% on the whole, versus +13.1% for the S&P 500. None of these stocks lost money that year.
Dare we ask about any "four-peaters," companies that made it to the BSP list a full four consecutive years? There were only two stocks in BSP history that fit the bill here: Dow Chemical (NYSE: DOW) in 1994 and NationsBank, now merged into BankAmerica (NYSE: BAC), in 1996. Dow Chemical gained 23.1%, vs. a loss of 1.5% for the S&P 500, and NationsBank gained 38.5%, vs. 22.9% for the S&P.
There you have it. The usual caveats about small sample sizes apply before we can make definitive conclusions. However, the trends certainly argue that patience is indeed a virtue in sticking with these stocks. Like fine wines, the BSP stocks seem to get only better with age!
The workshop message boards are replete with discussions about repeaters for a number of screens, most notably the Keystone approach. Perhaps someone can remind us if this topic has been rigorously addressed for the Dow Dividend strategy, with its more extensive database.
Beating the S&P year-to-date returns (as of 02-02-99):
Schlumberger (NYSE: SLB) +7.0%
Kimberly-Clark (NYSE: KMB) -10.3%
Campbell Soup (NYSE: CPB) -18.8%
Ford Motor Co. (NYSE: F) +1.3%
BankAmerica (NYSE: BAC) +5.5%
Beating the S&P -3.1%
S&P 500 +3.0%
Compound Annual Growth Rate from 1-2-87:
Beating the S&P +20.2%
S&P 500 +17.8%
$10,000 invested on 1-2-87 now equals:
Beating the S&P $92,500
S&P 500 $72,900