Three Former Rogues Fail 'Clean Stocks' Test

Who says good guys finish last? The Clean Stocks portfolio that readers and I started crafting last year has beaten the market hands down.

As of the close on June 17, eight of the 10 stocks in my Clean Stocks portfolio are up since I added them to the list. The average gain for the stocks in the group from the date of the first pick on Aug. 1, 2003, to the June 17 close is 18.5%. The S&P 500 is up 15% in that period.

For 2004 to the close on June 17, a period when I didn't add any new stocks to the list and thus the Clean Stocks portfolio was "fully invested," the stocks returned 8.2% on average. The S&P 500 was up 2% in the same period.

After a hiatus of about six months, I'm returning to the portfolio to update three nominations I made in December: Boeing(BA), Motorola(MOT) and Rite Aid(RAD).

It's been a long time since we've done this, so let's review the rules first.

I launched this cooperative effort to build a list of clean stocks last July. Over the months, readers helped me develop a final list and refine the set of eight rules that now form the test a Clean Stock must pass to get added to the portfolio.

Executive compensation: Excessive executive compensation, especially massive bonuses for mediocre performance, large personal loans and big grants of options, 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 company's control, such as currency exchange and interest rate changes.