Workshop Portfolio

<FOOLISH WORKSHOP>

Which Screens to Use,
Part 1
     

by Moe Chernick (moebruin@excite.com)

El Segundo, CA (July 22, 1999) -- If you have been reading my columns and are also familiar with the Foolish Four area, there are six different market-beating screens that we have been discussing: Unemotional Growth (UG), Keystone, Keystone EPS, PEG, RP4, and Beating the S&P 500 (BSP).

All sound great, but how does one know which screens to purchase? While intuition is to look purely at the numbers, I personally think once you know the numbers, overemphasizing them can be a major mistake. It may create an unbalanced portfolio that is more risky then an investor may feel comfortable with in a down market. Besides, based on our limited backtesting period, is a difference of 3 or 4 percentage points really significant?

In this article, I will show you a simple way for deciding which screens to use without once quoting the numbers. While I start with a short synopsis, you should be familiar with the above-mentioned screens before preceding forward. If you are not already familiar with these screens, go to the Report Archives and read the articles on UG, Keystone, and PEG that have been written since June -- and then go to the Foolish Four area to find out more about RP4 and BSP.

Here is a short synopsis of each screen containing all the information necessary to decide which to use. These synopses assume that you concur that each screen is valid. If you personally do not believe one or more of these screens are worth investing in, then cross them off your personal list.

RP4 (or other BTD variation) -- A large capitalization screen that looks for the 4 stocks in the Dow Jones Industrial Average that have the best value. It has by far the longest backtest, and while its returns are the lowest of the screens being discussed here, it is the most proven of all the screens. This screen performs best when stocks are held for at least a year.

BSP -- Similar to the RP4, the BSP looks for the best 4 or 5 stocks among the Standard & Poor's 500 Index. This screen can be used as a substitute or to complement the RP4. Its historic returns are similar to those of the RP4. This screen performs best when stocks are held for at least a year.

UG -- An aggressive growth screen that invests in the 5 stocks with Timeliness rating of 1 and with the highest EPS rating from Investor's Business Daily (IBD). This screen has the second-best results of the five screens listed but with by far the most volatility. The results of this screen have been mediocre over the last 2 and a half years. This screen performs best when traded monthly.

Keystone -- This screen is a growth screen that invests in the 5 or more stocks that are among the 30 largest-cap stocks with Value Line Timeliness ratings of 1 or 2 and that have had the best total return over the previous six months. This screen over its 12-year test period has consistently beaten the S&P 500 and the RP4. Its test results are also very symmetrical, which is a strong indicator of the validity of these results into the future. This screen performs best when traded once a year.

Keystone EPS -- A variation of the Keystone screen. This screen contains the 5 stocks that are part of the Keystone top 10 and have the best total returns over the last six months and the best earnings growth over the past 12 months. This screen returns slightly higher results than Keystone over most time periods. The screen performs best when traded once a year.

PEG -- A growth screen that buys the 4 or 5 stocks with Value Line Timeliness ratings of 1 or 2 that have high returns over the last 26 weeks, great projected earnings, and are low PEG values. This screen produces the highest returns of any of the screens listed here with relatively low volatility. The screen performs equally well when traded quarterly, semi-annually, or annually, however the annual returns may vary greatly depending on the time of year the screen is bought.

The first step in developing a portfolio is to separate the screens into Growth and Value. Many investors believe a balanced portfolio should contain both growth and value stocks. In general, the longer the investment time horizon, the more growth oriented the investor should be. In contrast, those with shorter time horizons should be more value oriented. Here is the growth and value breakout of our screens.

Value Screens: RP4, BTD
Growth Screens: UG, Keystone, Keystone EPS
Growth and Value: PEG

As you can see, PEG is classified as both Growth and Value. This is because PEG contains both growth and value elements. When allocating your portfolio between growth and value, I would handle PEG one of two ways. You can either weigh it two-thirds Growth and one-third Value or consider it purely a growth play. For simplicity, I will use the later approach in this article.

The second way to classify the screens is large stocks versus small stocks. There are two reasons for this breakout. First, small stocks tend to be more volatile but also have greater potential. Second, many people have no problems investing in companies they have heard of, but they get heart attacks when some $10.00 stock they never heard of shows up on the PEG screen. One note on the breakout is that in actuality there are no exclusively small-stock screens in the Workshop; there are only large-stock screens and those that take any size stock. But being people may want to limit their small-stock exposure, I will refer to any-size stock screens as being equivalent to a small-stock screen. Here is the breakout by size.

Large Stock Value Screens: RP4, BTD
Large Stock Growth Screens: Keystone, Keystone EPS
Any Stock Growth: UG, PEG

The final consideration is how often a screen trades. If all your money is in an IRA you can be flexible in deciding the time horizon. For non-IRA accounts, the leaning is toward annual screens, especially if you are in a tax bracket that is over 28%.

All the screens in this article are annual trading except for UG, which is a monthly traded screen, and PEG, which can be traded at almost any interval.

With this information, a portfolio meeting your needs and using these screens can be made. Next time, I will introduce you to three fictional investors, each with different needs. I will then use the information from this column to develop a portfolio for each of them.

Until next time, Fool on!

New Rankings | Workshop Returns


Workshop Portfolio


9/28/01 as of ~5:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AETAETNA INC NEW0.943.36%28.94
BABOEING CO(1.04)(3.02%)33.36
CATCATERPILLAR INC1.112.53%44.91
COGCABOT OIL & GAS 'A'0.693.59%19.90
DDDU PONT (EI) DE NEMOURS0.992.74%37.14
DGXQUEST DIAGNOSTICS(0.45)(0.73%)61.42
EKEASTMAN KODAK0.421.31%32.49
GMGENERAL MOTORS1.393.38%42.55
LHLABORATORY CORP AMER HLDG(NEW)1.141.42%81.21
MOPHILIP MORRIS COS(0.76)(1.55%)48.24
NEWPNEWPORT CORP0.261.90%13.97
NVRNVR INC(0.54)(0.38%)140.41
PKXPOHANG IRON & STEEL ADS1.097.51%15.61
PVNPROVIDIAN FINANCIAL1.075.64%20.04
QCOMQUALCOMM INC(0.40)(0.84%)47.16
RJRRJ REYNOLDS TOBACCO HLDGS(0.69)(1.19%)57.31
SLESARA LEE CORPUnchg.Unchg.21.09
UNFIUNITED NATURAL FOODS0.563.18%18.15
WMIWASTE MANAGEMENT(0.01)(0.04%)26.74

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(12/24/1998)
Workshop1.30%7.32%(12.02%)(20.66%)(18.91%)
Comparable S&P 500n/an/an/an/a(19.07%)
S&P 500 (DA)1.95%7.48%(8.33%)(21.22%)(14.88%)
NASDAQ2.02%4.71%(17.46%)(39.68%)(31.41%)
DJIA (DA)1.68%7.07%(11.07%)(17.86%)(2.22%)

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (12/24/1998)
Workshop(17.62%)
vs. S&P 500(17.63%)

Trade Date # Shares Ticker Cost/Share Price Total % Ret
1/8/0126MO40.9448.2417.82%
1/8/0122RJR50.1057.3114.39%
1/8/0167UNFI16.4518.1510.34%
12/24/9824CAT43.0844.914.24%
1/8/018NVR136.63140.412.77%
1/8/0140WMI27.4426.74(2.54%)
1/8/0150SLE22.5421.09(6.42%)
1/8/0161PKX17.8315.61(12.46%)
1/8/0115DD48.8337.14(23.95%)
1/8/0129AET38.1728.94(24.19%)
1/8/0139COG28.7519.90(30.79%)
1/8/0114QCOM75.5447.16(37.57%)
1/8/018LH134.6981.21(39.70%)
12/27/9918GM73.2642.55(41.92%)
1/8/0118BA59.5333.36(43.96%)
1/8/019DGX114.4961.42(46.35%)
12/27/9920EK65.0932.49(50.08%)
1/8/0120PVN55.5020.04(63.89%)
1/8/0115NEWP74.9613.97(81.36%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
1/8/0126MO$1,064.50$1,254.24$189.74
1/8/0122RJR$1,102.25$1,260.82$158.57
1/8/0167UNFI$1,102.12$1,216.05$113.93
12/24/9824CAT$1,034.00$1,077.84$43.84
1/8/018NVR$1,093.00$1,123.28$30.28
1/8/0140WMI$1,097.50$1,069.60($27.90)
1/8/0150SLE$1,126.88$1,054.50($72.38)
1/8/0161PKX$1,087.75$952.21($135.54)
1/8/0115DD$732.50$557.10($175.40)
1/8/0129AET$1,107.00$839.26($267.74)
1/8/0139COG$1,121.37$776.10($345.28)
1/8/0114QCOM$1,057.62$660.24($397.39)
1/8/018LH$1,077.50$649.68($427.82)
1/8/0118BA$1,071.50$600.48($471.02)
1/8/019DGX$1,030.44$552.78($477.66)
12/27/9918GM$1,318.62$765.90($552.73)
12/27/9920EK$1,301.75$649.80($651.95)
1/8/0120PVN$1,110.00$400.80($709.20)
1/8/0115NEWP$1,124.37$209.55($914.83)
 
Cash: 
Total: 
$10.80
$15,681.03
 

Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.
• DJIA (DA) = dividend adjusted. Dividends have been added to the total return of the DJIA.

Note
Note: The Workshop Portfolio was launched on December 24, 1998, with $4,000 which was invested in the Foolish Four strategy. Approximately $15,000 was added on January 8, 2001, to support five additional mechanical strategies. At that time approximately $1000 was transfered out of the Foolish Four strategy to bring the Foolish Four into balance with the other strategies. (That's why the Foolish Four's overall return is not consistent with stock values.) Such rebalancing will take place each year among the strategies so that each will start out with approximately the same value at the begining of the year. No more cash additions are planned. The first four tables above show the overall performance of the portfolio. Below that we also track the performance of each component strategy. All transactions are announced publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen using strategies developed by the Workshop community.