Value Line Stock Rankings--Timely Tweaking May Add Value
Value Line Inc. loves to tout the success of its “timeliness” stock ranking system, which rates 1,700 stocks of all sizes on their prospects for the next six to 12 months based on earnings and price momentum.
The top stocks, as featured in the weekly Value Line Investment Survey--a favorite of individual investors and investment clubs for decades--have, on average, beaten the broad market over the long term, independent studies show.
But is the system still timely in today’s fast-moving market? Are there ways to tweak Value Line’s work for your own benefit, as an individual investor or as a club?
Here’s a look at the Value Line system, how it works, and how investors today might put it to best use in tandem with other stock-picking resources:
Tip One: It Still Seems to Work Well
Though the market arguably has become far less research-oriented than it was when Value Line’s numbers-filled publication was launched in 1965--today, after all, seemingly everybody and their grandmother just keys on stocks’ price momentum, or lack thereof--Value Line’s timeliness rankings appear to have held their edge.
Through April, Value Line’s top-rated stocks returned an annualized 19.6% over the previous two years, versus 14.4% for the broad-market Wilshire 5,000 index, calculates Mark Hulbert, editor of the Hulbert Financial Digest, a newsletter based in Alexandria, Va., that tracks the performance of stock-picking publications.
New York-based Value Line rates stocks on a 1-to-5 scale for timeliness, with 1 being the highest rating.
Value Line’s research chairman, Samuel Eisenstadt, notes that the top-rated stocks, as a group, consistently outperform the second group (those rated 2 for timeliness) in the following 12 months in the aggregate, and the 2s beat the 3s, and so on.
Because Value Line’s system is proprietary, the exact methodology for ranking stocks is secret. But its computer program sorts through companies’ long-term price and earnings history, recent price and earnings momentum and the latest earnings surprises, among other factors.
Though it’s best known for the timeliness rankings, Value Line analysts also provide one-page write-ups, with fundamental statistics, for each of the 1,700 stocks covered. A lot of investment clubs and other investors use these pages, which provide a more thorough snapshot than most sources.
For many investors, Value Line’s biggest drawback is its subscription price: $570 a year. That’s why some investors prefer to just snag their local library’s copy and duplicate the pages that cover the stocks they’re researching.
Those who do subscribe can access Value Line’s updates at https://www.valueline.com.
Tip Two: Look Beyond Timeliness
Because Value Line covers so many stocks, most individual investors would see their portfolios chewed up by trading commissions if they tried to religiously follow the survey’s picks and weekly revisions--assuming you had the capital to buy all the names in the first place.
Eisenstadt recommends “starting with purchases only from the 1s [timeliness ratings] and holding those stocks [even] if they are downgraded to a 2--unless there’s some weird reason to sell. But if they go down to a 3, then get out and replace them with something new from the top group.”
But tweaking the numbers slightly can help you pick the best stocks from the start.
Eisenstadt said investors can simplify their stock shopping list and improve their performance by sticking with stocks that have top “technical” ratings as well as timeliness ratings. That shrinks Value Line’s elite 100--the group of stocks each rated 1 for timeliness--to about 40.
Technical ratings look at each stock’s recent price performance in light of its historical trading patterns, without regard to fundamental factors such as earnings.
Eisenstadt isn’t the only one who likes to play with the numbers.
In the “Unemotional Growth” stock screen featured at the Motley Fool’s Web site (https://www.fool.com), investors start with Value Line’s top timeliness stocks, then select those with the highest earnings per share rankings in Investor’s Business Daily. Ties are broken by using IBD’s “relative strength” ratings, which measure stock price performance relative to the market.
The top 10 “unemotional growth” stocks picked Dec. 31 are up an average of about 9% this year, while the Standard & Poor’s 500 blue-chip index is down 1.6%.
The Fool’s site posts up-to-date rankings for those allergic to math. Current leaders include JDS Uniphase (JDSU), Network Appliance (NTAP), ADC Telecom (ADCT) and Siebel Systems (SEBL).
Tip Three: Use Other Data as a Complement
Value Line can be a great anchor for your stock picking. But many investors use other sources now available on the Internet to complement Value Line’s data.
To find a few examples, we randomly picked a name from Value Line’s index page of current top-timeliness stocks: Mount Prospect, Ill.-based Salton (SFP), an appliance and housewares retailer best known for its George Foreman Indoor Grill.
Value Line’s latest report, from mid-April (stock groups are updated on a rolling basis) notes that revenue has been growing briskly, boosted by deals that gave Salton the Toastmaster product line and exclusive rights to use the boxer’s name on its goods.
Value Line calls the stock risky, but potentially lucrative. Salton’s price-to-earnings ratio is low, but the firm has a high debt load and heavy reliance on the Foreman grill, which accounted for 40% of last year’s revenue.
To get more information on Salton, we surfed the Web, starting with the financial mega-sites DailyStocks.com (https://www.dailystocks.com) and SuperstarInvestor.com (https://www.superstarinvestor.com). These can be a handy place to start, with dozens of links arranged by investing topic.
We also searched some Web message boards and stock-chat sites. Of course, even at reputable sites such as The Fool, Raging Bull (https://www.ragingbull.com) and Silicon Investor (https://www.siliconinvestor.com), postings should always be taken with a pound of salt, and Salton proved to be no exception. Like many message boards, Salton’s was generally gung-ho.
One posting raved, “Salton somehow manages to find the latest must-have gadget . . . which for me happens to be that double coffeepot that you can brew one pot of regular coffee and one pot of decaf. Hey, if you are having folks over for dinner and some like high-test and some don’t, it’s a nice solution to have a two-fer.”
To get the view from the professionals, we went to BulldogResearch.com (https://www.bulldogresearch.com), which features projections from top Wall Street analysts. Bulldog’s company snapshot noted that Salton has a solid consensus recommendation from analysts of 1.2 (on a scale of 1 to 5), according to data tracker IBES International.
By comparison, other stocks in the housewares industry average 2.1, according to Bulldog.
The page on earnings estimate trends shows that even though the stock has been slumping, profit projections look decent: The company is expected to make 97 cents a share this quarter and $1.63 in the next quarter. The company is expected to make $5.94 this fiscal year, which would be an increase of 147% over last year’s earnings. The estimate for next year: $6.64.
Finally, we got technical at Big Charts (https://www.bigcharts.com). Since we have trouble differentiating a stock chart from a seismograph, we showed it to an amateur technician pal.
Salton’s pattern shows that the stock went vertical in February on high volume, reaching a classic “climax top.” The stock has since ground downward with a series of lower highs and lower lows--not a good pattern to many technicians.
So what did we learn from these sources?
Our Web search backed up Value Line’s assessment of Salton as a risky but potentially rewarding stock for investors with strong stomachs. Indeed, the stock is down by about one-third since Value Line did its report.
Oh, and that double coffeepot sounds kind of cool.
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Times staff writer Josh Friedman can be reached at josh.friedman@latimes.com.
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Double Chart Toppers
One strategy for using the Value Line Investment Survey calls for selecting stocks rated “1,” or best, in both the Timeliness and Technical categories. Among the approximately 40 stocks that currently meet those criteria are:
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Ticker Monday 52-week Trailing Company symbol close high/low P/E ratio AVX AVX $31.38 $50.00/$10.50 35 Adobe Systems ADBE 121.25 132.00/33.63 72 ArthroCare ARTC 73.00 158.50/17.50 84 Analog Devices ADI 92.50 96.25/20.81 101 Applied Materials AMAT 91.06 115.00/31.13 55 CSG Systems Intl. CSGS 54.63 74.50/20.25 42 Cytyc CYTC 60.44 65.88/9.25 189 Electro Scientific ESIO 48.69 69.13/17.09 48 Flextronics Intl. FLEX 65.00 79.75/21.25 67 Immunex IMNX 31.50 83.61/13.77 220 I2 Technologies ITWO 124.88 223.50/13.06 463 JDS Uniphase JDSU 115.56 153.42/16.75 405 Macromedia MACR 99.31 103.25/27.38 144 Nortel Networks NT 60.50 72.09/19.91 99 Oracle ORCL 80.56 90.00/12.47 85 Plexus PLXS 99.44 105.13/24.44 65 QLogic QLGC 53.31 203.25/27.13 67 Rambus RMBS 218.81 471.00/58.50 509 Symantec SYMC 69.06 81.63/23.13 33 Techne TECH 94.69 102.13/23.75 87 S&P; 500 SPX 1,446.00 1,552.87/1,233.66 25*
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*Estimated P/E ratio for 2000
Sources: Value Line, Bloomberg News
