Workshop Portfolio Key100: A Keystone Variation

By Moe Chernick (Moebruin)

EL SEGUNDO, CA (Dec. 7, 1999) -- The Keystone screen is a growth stock version of the Foolish Four. Where the Foolish Four looks for large cap stocks that are undervalued, the Keystone strategy looks for large cap stocks that are growing quickly. There are three different versions of the Keystone strategy: Keystone, Keystone EPS, and Keystone 100.

The Keystone and Keystone EPS have been discussed in previous workshop articles. Today we look at Key 100 and compare the three versions.

The Keystone 100 screen is very similar to the original Keystone. It selected the largest domestic market cap stocks from among the top 400 most timely stocks as rated by Value Line. The top 30 stocks by market cap were selected and those stocks were then ranked by total return over the past 6 months. Why 30 stocks? Well, creator Robert Sheard was looking for a high growth alternative to the Dow -- which consists of 30 stocks.

The Keystone EPS starts with the original Keystone 10 stocks and ranks them by "earnings per share growth" over the past year. Many investors feel that including a fundamental stock selection criteria like earnings growth makes the Keystone screen more reliable.

But Foolish Workshop contributor Powerphil wondered how the Keystone would work if it wasn't limited to just 30 high capitalization stocks from the U.S. He tested a version that included foreign companies, as long as they were traded on the New York Stock Exchange, American Stocks Exchange or Nasdaq. He changed the cutoff point from 30 to the 100 largest companies.

The steps for doing the Keystone 100 using Value Line for Windows Software are as follows:

1. Select only stocks with a Timeliness Value of 1 or 2 (this will give you a list of 400 stocks)
2. Eliminate all stocks not traded on the NYSE, AmEx or Nasdaq exchanges
3. Sort by market cap, highest to lowest, and select the top 100 stocks
4. Sort by "Total Return - 26 Weeks," highest to lowest
5. Buy and hold for one year either the top 5 or top 10 stocks

Three versions of Keystone can make it tough to decide which one to use so let's compare returns. The following returns are the compounded average growth rates for five stock versions of each portfolio tested from 1987 through 1998. Twelve portfolios were tested for each strategy, each portfolio starting/renewing in a different month.

Start

Month      Keystone      KeyEPS      Key 100
Jan.         27.5         31.6        33.2
Feb.         30.2         29.5        40.1
Mar.         18.3         19.8        29.4
Apr.         23.9         20.4        24.5
May          20.3         19.8        21.2
June         21.2         23.8        22.3
July         20.6         21.5        19.6
Aug          26.3         28.4        14.7
Sep.         21.1         20.8        28.6
Oct.         17.5         18.7        26.1
Nov.         25.4         23.3        25.4
Dec.         33.5         34.1        29.7
Avg.         23.8         24.3        26.2

The data shows that overall and on a month by month basis, the Keystone-EPS beats the original strategy, but not by very much. In contrast, the Keystone 100, which uses a larger pool of stocks to select from, beats them both. The Keystone 100 does best in seven starting months, compared to four for the Keystone EPS with a tie in November between the original Keystone and Keystone 100.

The numbers also show a seasonal effect with December, January, and February outperforming most other months, although one should probably take the differences between those three with a large dose of salt. With a 12 year backtest, the data is somewhat vulnerable to the effects of chance when it comes to something like the difference between a January start date and a February start.

The differences between the three are not major, although it is rather difficult to justify the original Keystone when compared to the results of the Key100. The Key100 seems to be a significant improvement on an old favorite.

Until next time, Fool On!

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.