Building a Portfolio

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Building a Portfolio

Introduction

 

There are many things to look at when you are evaluating an equity investment. For example, you must try to assess the company's long-term prospects, taking into account factors such as competition, emerging technologies, raw material costs, labor costs, and financial strength.

Finding all that information on your own and knowing how to evaluate it can be a daunting task. Professional securities analysts go to great lengths to read annual and quarterly reports, 10-Ks and 10-Qs filed with the SEC, the financial press, trade publications, and more. They also talk to competitors, visit plants and retail sites, and interview management. You probably don't have the time for in-depth research. And since you want to build a diversified portfolio, you would have to be studying several companies at the same time.

 

To simplify that process, Value Line has developed an investment strategy you can use to help you meet your investment goals. It's a way to help you quickly identify stocks that are likely to perform best, based on the company's Timeliness Ranking System. Timeliness ranks for individual stocks and industries are published each week in The Value Line Investment Survey

The Value Line Investment Survey

 

The Value Line Investment Survey is a three-part publication available to subscribers in print and online. Value Line University introduces you to the information The Value Line Investment Survey provides and the ways you, as an investor, can benefit from it. 

Part 1—Summary & Index—is a weekly guide to the contents of The Value Line Investment Survey. It lists the page numbers for all the companies analyzed and whether the stocks have moved up or down in Timeliness over the last week. It also lists the industries that are covered as well as industry ranks. It also provides a capsule summary of essential statistics for each stock in The Value Line Investment Survey, and other current information.
Part 2—Selection & Opinion—presents Value Line's latest economic and stock market commentary, plus analysts' advice on current investment strategies, one or more interesting stock selections, and a variety of timely economic and stock market statistics. It also includes four model stock portfolios-each designed to meet a different investment objective.
Part 3—Ratings & Reports—is the core of The Value Line Investment Survey. It provides regularly updated information and analysis on each of approximately 1,700 stocks in more than 95 different industries. The Survey reports on stocks and industries in a distinctive one-page format. Information on each page is updated every 13 weeks.
Selection & Opinion

 

To help you make the most of the information it provides, every week Value Line reviews the current business environment and analyzes the economic and interest rate trends that affect the stock market in the "Economic and Stock Market Commentary" on the front page of Selection & Opinion. Value Line also updates the allocation of equities and cash reserves it's recommending.

The rest of Selection & Opinion presents additional investment analysis, including some general background information and some that you can use in building and managing your own portfolio. Some of the features are weekly while others appear on a quarterly, semi-annual or annual schedule.

"Market Monitor," for example, tracks changes in the major equity indexes, trading volume, key interest rates and related information, while the "Quarterly Economic Review" presents a detailed analysis of recent economic developments and a detailed economic forecast.

The "Stock Highlight" focuses on one of the stocks favorably ranked for Timeliness in The Value Line Investment Survey. The Stock Highlight provides a more detailed examination than is possible in the analyst's report that appears on that stock's Value Line page.

Value Line’s Model Portfolios

To illustrate how an investment strategy can meet different goals, Value Line analysts select and maintain four model portfolios, each with a distinctive investment objective. All four portfolios hold 20 stocks. 

These portfolios, which are closely monitored and regularly updated, are featured each week in Selection & Opinion along with a brief commentary on changes in the lists or a discussion of one of the companies currently held.

 

To be considered for Portfolio 1, modeled for the more aggressive investor wanting to emphasize price appreciation rather than income, a stock must have a Timeliness rank of 1 or 2 and the company must possess a Financial Strength grade of at least B+ at the time of purchase. Although the analyst managing the portfolio can sell a holding at any time, either to buy a stock that seems to have a greater potential or to realign the portfolio diversification, any stock whose Timeliness rank falls to 3 or lower is automatically dropped. 

Here are some other characteristics of Portfolio 1:

  • The companies have generally had above average earnings records.
  • The companies often have relatively smaller market capitalizations.
  • Few of these stocks pay a meaningful dividend and most pay no dividends at all.
  • A number of the stocks in the portfolio have Betas considerably higher than 1, which indicates that they are more volatile than the market as a whole. (Betas are showing on the Value Line company reports in the upper left corner.)

Portfolio 2, for the moderate investor, includes stocks that will provide above-average income and whose prices have the potential to increase. Typically, more conservative investors will be most comfortable with a portfolio such as this one.

 

To be included in the portfolio, a stock must pay a large enough dividend so that its yield ranks in the top half of all stocks tracked in The Value Line Investment Survey. It must also have a Timeliness rank of at least 3 at the time of selection and a Safety rank of 3 or higher. If the Timeliness or Safety rank drops below 3, the stock is automatically dropped from the portfolio.

Here are some distinguishing features of Portfolio 2:

  • The stocks in this portfolio are commonly ranked 3 (Average) for Timeliness rather than the 1 or 2 typical of Portfolio 1.
  • The portfolio includes some value stocks, which are equities that typically trade at lower P/E ratios than the other stocks tracked in The Value Line Investment Survey
  • With few exceptions, the Betas of the stocks in Portfolio 2 are below—sometimes well below—those in Portfolio 1, which indicates that the stocks generally change in price more slowly than the market in general. 

Portfolio 3 emphasizes stocks with the potential for large 3- to 5-year price increases. It is most appropriate for investors focused on long-term capital gains.

Stocks in this portfolio are those the analysts believe have well-defined growth potential and have Timeliness and Safety rankings of at least 3 at the time they are added to this portfolio.

In addition, you can observe that:

  • This portfolio is more varied than the others in almost every area. The range of prices is the greatest as is the variation in P/E’s. There is also a greater mix of stocks paying above-average dividends and those paying no dividends.
  • The portfolio at times includes stocks with no Timeliness rank because of recent restructurings or pending acquisitions.

Portfolio 4 should interest those investors focused on income. It focuses on stocks with above-average dividend yields. In fact, for inclusion, an equity must have a yield that is, at minimum, one percentage point above the median of all dividend-paying stocks tracked in The Value Line Investment Survey, a Timeliness rank of at least 3, and a Financial Strength grade of B+ or higher at the time of purchase.

In addition, you can observe that:

  • The stocks within the portfolio are typically selected from a broad range of industries, which provides a meaningful degree of diversification.
  • The portfolio’s risk profile will likely be less than the broader market, given the usual concentration of low-Beta stocks.
The investment performance of all four portfolios is published quarterly in the Selection & Opinion.
Suggestions for Building a Portfolio

You can use the Value Line portfolio that seems to be most aimed at achieving your own objectives. Or you can select individual stocks from the Value Line Ranking System to add to your holdings.

It is important to remember that if you are picking and choosing among stocks in the different lists, you always maintain a diversified portfolio. So, as you buy new stocks, choose them with an eye to how they will complement those you already own.

We recommend that you own at least 10 stocks in several different and diverse industries and pick from stocks ranked 1 and 2 for Timeliness in the highest ranked industries. You should also try to have stocks with Safety and Technical ranks of 3 or better.

The Value Line approach to building a strong and diversified portfolio that is likely to outperform the market is to select timely stocks in timely industries—that means stocks ranked 1 or 2 for Timeliness in relation to the universe of stocks that Value Line tracks and industries ranked in the top third of all those followed by Value Line.

A good way to start is to turn to the section called Timely Stocks in Timely Industries, usually found on page 25 of the Summary & Index. In addition, you should use a range of other information provided on the Value Line page to help you select from among the stocks ranked 1 and 2 in their specific industries, concentrating on those industries in the top third of the Timeliness ranks.

Another approach is to use the many stock screens (stocks listed according to various criteria) in the second half of the Summary & Index to search for interesting candidates for your portfolio.

Building Your Portfolio Maintaining Your Portfolio
What Value Line Does What You Should Do  
By Industry – Timeliness

Value Line ranks industries in order of their Timeliness (relative price performance in the next 12 months).

Read the latest Value Line reports on the top-ranked industries. Select at least six industries rated highest for Timeliness.

 
By Stock – Timeliness

Value Line ranks approximately 1,700 stocks in five categories according to their Timeliness. The top 100 stocks are ranked 1 (Highest) for expected relative performance over the next 12 months; 300 are ranked 2 (Above Average); about 900 are ranked 3 (Average); 300, 4 (Below Average); and 100, 5 (lowest).

Make up a list of those stocks included in your six or more most timely industries that are also ranked 1 (Highest) or 2 (Above Average) for relative price performance in the next 12 months.

When and if a stock in your portfolio is found to be no longer a timely investment – that is to say, it has fallen to a rank 4 or 5 for Timeliness – make that stock a candidate for sale.

By Stock – Safety

Value Line also ranks approximately 1,700 stocks according to their Safety in five categories with 1 (Highest) expected to be least volatile and financially most strong, and 5 (Lowest) most volatile and least strong financially.

Eliminate from your list of Timely Stocks in Timely Industries those that fall short of your Safety standard.

These Safety ranks are significant and should not be ignored.

By Stock – Technical

Value Line also ranks approximately 1,700 stocks according to their expected price performance relative to the overall market in the next three to six months, based on complex analysis of the stock's relative during the prior 52 weeks. Unlike the Timeliness Rank, earnings are not a factor in the Technical Rank.

Particularly if you are a short term investor, you should look at the Technical Ranks and try to limit purchases to stocks with Technical ranks of 1 or 2. Under no circumstances, however, should the Technical Rank replace the Timeliness Rank, which has a superior record over the years.

 
By Stock – Income

Value Line estimates the next 12 months dividend yield of each stock at its most recent price. The expected yield is updated in the weekly Summary & Index. Value Line also shows the median yield of all dividend-paying stocks for comparative purposes.

Eliminate from your list of Timely Stocks in Timely Industries those that fall short of your current-income standard. For example, if your yield standard is 3%, you may want to eliminate stocks that yield less than 3%.

When a stock is sold, replace it with another stock ranked 1 or 2 for Timeliness that also meets your standards for Safety and current income. It would be best in the long run to maintain diversification through six or more stocks in at least six different industries.

Value Line Reports

Value Line reports on each stock and each industry once every three months, on a preset schedule, in the Ratings & Reports section. The page numbers on which reports appear are shown in the weekly Summary & Index. When new information requires, a "Supplementary Report" is issued as often as weekly in the final pages of the Ratings & Reports section and online on the day it is written.

Read the latest Value Line reports on the industry groups and stocks that have qualified according to all of your standards.

Make your final selection of 10 or more stocks from the list that has been refined through the above procedures.

Read these report pages regularly to ensure that the stocks you own or are interested in meet your criteria.

Selection & Opinion

Value Line's Selection & Opinion section provides a current appraisal of the economy and the stock market. It recommends how much of one's capital should be invested in common stocks and how much should be set aside temporarily in cash reserves.

Read Value Line's Selection & Opinion each week. Also, go to the Value Line web site for our latest Daily Commentary.

When the Value Line service in its Selection & Opinion section recommends building cash reserves because the general market seems temporarily to be too high, sell stocks and invest instead in short-term government bonds or other safe instruments. In selling, dispose of stocks ranked 5, 4 or 3 for Timeliness, in that order.

Managing a Portfolio

Once you have begun to buy stocks, you'll need to monitor your portfolio. Here's the Value Line approach:

  • Set up a portfolio to monitor the stocks you own or those you are considering. You can do this on the Value Line Web site.
  • Check the prices of your stocks on www.valueline.com and look for news relating to your holdings.
  • Check your portfolio on the Value Line Web site regularly-perhaps once a day or once every other day-to look for news developments affecting your stocks.
  • Keep up to date with the full and supplementary reports Value Line issues on your stocks, as well as any changes in their Timeliness, Safety or Technical ranks.
  • Take appropriate action, including selling stocks that have dropped in rank or seem likely to come under selling pressure.
Updating a Portfolio

 

Choosing appropriate stocks is only the first phase of successful investing. You also have to keep track of how your investments are performing and make decisions about when to replace your holdings.

Typically, changing conditions in the economy as a whole or in the stock market are signals to update your portfolio. Successful investors keep regular track of their portfolios and adjust them when appropriate to keep their investment strategies on track, even when the stock market in general is performing in a fairly consistent way.

The information in The Value Line's Investment Survey that you use to identify stocks to buy initially is the same information that can help to track and update your portfolio. For example, if you select a stock because it is ranked 1 or 2 for Timeliness, but during the period you own it the rank is downgraded to a 4, that is a stock you would normally replace if you were using the Value Line investment strategy.

Statistical evidence supports that approach. In fact, investors who consistently sell a stock when it falls to a rank 3, rather than waiting until it drops to rank 4 or 5, have had a higher overall portfolio return although they have also paid higher brokerage fees because they have been trading more frequently.

While Value Line updates its performance data and the Timeliness and Technical ranks every week, you will probably find that updating your individual portfolio somewhat less frequently is also a reliable approach.

Next in Value Line University: Studying a Stock