Jubak's Journal
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Jubak's Clean Stocks portfolio
By Jim Jubak
I launched this cooperative effort to build a list of clean stocks in July 2003 in my column, "Join forces to build a list of stocks to trust." Since I started the portfolio, the average gain for the 11 stocks in the list is 21%, against a gain of 21% for the S&P 500 Index ($INX). The relative performance of the portfolio has been even better in 2004, with the Clean Stocks gaining 13.8% while the S&P returned 9%.
8 simple rules
Over the months, readers helped me develop a final list and refine the set of eight rules that now form the test a stock must pass to get added to the Clean Stock portfolio:- Executive compensation: Excessive executive compensation, especially massive bonuses for mediocre performance, large personal loans and big stock-option grants are signs that the board of directors may be asleep. They also give executives an incentive to manage for short-term goals that line their own pockets.
- Accounting: Financial reporting should be as free as possible of one-time charges that make it difficult to get a handle on company performance. It should give a picture of company performance without the effect of trends outside the companys control, such as currency exchange and interest-rate changes.
- Conflicts of interest: A big danger sign: Entrenched accountants that have done the books year in and year out. Danger signs also include massive amounts of consulting work with the company and a lack of strong outside directors on the companys accounting, compensation and corporate-governance committees.
- Growth strategies: Growth by acquisition can produce a constant barrage of one-time charges and write-offs that make it impossible to judge company performance.
- Corporate structure: A company with a plethora of subsidiaries and off-balance-sheet entities presents a challenge to investors trying to figure out where the cash is coming from and where its going.
- Options accounting: Companies should engage in modest use of options and accounting that honestly tries to account for options as compensation.
- Pension accounting: Companies with defined-benefit pension plans that are clearly understating the size of their future pension liabilities should get the ax.
- Potential return to investors: Shares of the company in question should show the potential for outperforming the market over the long term.
In each Clean Stocks column, I put three stocks, nominated by readers, to the Clean Stocks test. Those that make it get added to the portfolio. And I end each column with a request for nominees for the next round.
| Clean Stocks | | Company | Gain -- all dates | 2004 gain | Purchase date | Purchase price | | Apache (APA, news, msgs) | 59.8% | 24.7% | 8/1/2003 | $31.11 | | Applebee's International (APPB, news, msgs) | 13.9% | 0.9% | 9/19/2003 | $22.27 | | Berkshire Hathaway B (BRK.B, news, msgs) | 3.8% | 4.3% | 12/19/2003 | $2,768.00 | | Cincinnati Financial (CINF, news, msgs) | 1.1% | 1.1% | 11/16/2004 | $43.76 | | Expeditors International (EXPD, news, msgs) | 53.5% | 48.4% | 9/19/2003 | $36.15 | | Paychex (PAYX, news, msgs) | -1.8% | -8.4% | 8/1/2003 | $32.17 | | Stryker (SYK, news, msgs) | 29.7% | 13.5% | 10/7/2003 | $38.52 | | Trustmark (TRMK, news, msgs) | 1.2% | 6.1% | 11/25/2003 | $29.25 | | T. Rowe Price Group (TROW, news, msgs) | 40.3% | 31.2% | 10/7/2003 | $42.20 | | Walgreen (WAG, news, msgs) | 14.4% | 5.5% | 11/25/2003 | $36.62 | | The Washington Post (WPO, news, msgs) | 16.0% | 24.2% | 12/19/2003 | $772.50 | | Average Clean Stock return | 21% | 13.8% | | | | S&P 500 return | 21% | 9% | | |
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Performance numbers for all dates and 2004 are as of the market close on Jan. 12, 2005 or Dec. 31, 2004, respectively.
At the time of publication, Jim Jubak owned or controlled shares in the following equities in this portfolio: Berkshire Hathaway. He does not own short positions in any stock in this portfolio.
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