'Clean Stock' in a Sullied Business: T. Rowe Price

Studying how you made a profit in the past may be the best way to increase your profits in the future.

That's certainly true for my Clean Stocks portfolio, where one stock that scored unexpectedly large gains could hold the key to a long-term strategy for beating the market again and again while taking on a very modest amount of risk.

Think of this strategy as a way to improve the profitability of any buy-on-the-dip trades you make.

I'm certainly pleased that the Clean Stocks portfolio I started on Aug. 1, 2003, continues to beat the S&P 500. Since I started the portfolio, the average return for the 10 stocks in the list is 22%, vs. a 20% return for the S&P 500. The relative performance of the portfolio has been even better in 2004: The Clean Stocks have returned 11.5%; the S&P 6%.

Scandal-Free Profits

But it's the source of that outperformance that I find most interesting -- and potentially most useful for making profitable trades in the future.

I would have expected Apache (APA Quote) to be among the stars of the group. After all, this market has seen huge gains for oil stocks, so the 59% return since I added the stock to the portfolio on Aug. 1, 2003, isn't particularly surprising.

Neither is the almost 50% return on Expeditors International (EXPD Quote) since it joined the portfolio on Sept. 19, 2003. That stock has a long history of rocketing ahead of the market averages.

It's the No. 3 stock on the Clean Stocks hit parade that's unexpected: mutual fund company T. Rowe Price (TROW Quote), which averaged a return of 8.25% per year over the last five years, and has returned 41% since I added it to the Clean Stocks portfolio on Oct. 7, 2003.

T. Rowe Price shares may be up strongly in that period for lots of reasons. For example, in its third-quarter report, the company announced that assets under management had climbed to a record $212 billion, up 26% from the third quarter of 2003.

It certainly didn't hurt that T. Rowe Price has remained untouched by the scandals that have roiled the industry and sent dollars flowing away from fund groups run by Putnam Investments, a unit of Marsh & McLennan (MMC Quote), and Janus Capital (JNS Quote). It's hard to quantify, but some part of that 26% increase in assets in the last year is a result of investors taking money from other mutual fund groups and sending it to a group perceived as being free of scandal.