Studying a Stock
How To Use The Value Line Investment Survey Page
To start studying a stock, we suggest that you concentrate on the major features found on every company page of Ratings & Reports. These are:
The Value Line Ranks: Timeliness, Safety, Technical;
The Analyst's Commentary;
Historical Financial Data;
Annual Rates (of Change);
Target Price Range;
Projections (of 3- to 5-year stock prices);
One way Value Line ranks stocks is by their expected price
performance relative to all other of the approximately 1,700 stocks Value Line
follows, over the coming six to 12 months. The Timeliness rank identifies those
stocks followed in The Value Line Investment Survey which are likely to have
the best relative performance.
All of the approximately 1,700 stocks Value Line tracks in
The Value Line Investment Survey are ranked in relationship to each other, from
1 (the highest rank) to 5 (the lowest rank). Stocks ranked 1 and 2 are expected
to show stronger price performance than the remaining stocks, while those
ranked 4 and 5 are likely to underperform or have weaker price performance.
At any given time
100 stocks are ranked 1
300 stocks are ranked 2
900 stocks are ranked 3
300 stocks are ranked 4
100 stocks are ranked 5
Relative earnings and price growth over the past 10 years
is the major factor in determining Timeliness. Companies whose earnings growth
over the past 10 years has been greater than the increase in their stocks'
prices tend to be ranked 1 or 2. Other factors that influence the Timeliness
rankings are stock price momentum, quarterly earnings performance, and earnings
Stocks ranked 1 and 2 for Timeliness can be more
volatile than the market in general, and frequently are stocks of smaller
Using Timeliness and Other Factors in Choosing Stocks
The Economy And Value Line's Market Strategy
First, read Value Line's current summary and
opinion of the economy, the stock market, and advisable investment strategy
entitled "The Value Line Equity View" in Selection & Opinion.
Remember that it is not necessary for the ordinary investor,
who usually has other business interests, to read everything that is published.
The service is so organized that it can also be used as a reference. You can
look in the Summary & Index every week to find updated references
about stocks that you own or in which you may be interested. The stock ranks
also provide you with buy and sell recommendations, which you may act upon.
We must caution that a prudent investor ought to think of
stocks as components of a portfolio, rather than as single entities.
Diversification reduces the overall risk of stocks within a portfolio.
Diversification is an important advantage, long recognized by sophisticated
investors, yet often ignored by many who think in terms of single stocks
without reference to the portfolio as a whole.
Second, look at industries ranked in order of
Timeliness in the screen on page 24 of the weekly Summary & Index.
To be sure that your portfolio is diversified, pick from that list at least
six industries shown to be most timely -- i.e., those industries ranked one
Third, look to the 100 stocks ranked 1 (Highest) and
the 300 ranked 2 (Above Average) for Timeliness. These ranks for relative
performance for the next six to 12 months appear in both Ratings &
Reports and in the weekly Summary & Index. (Once a stock ranked
1 or 2 for Timeliness has been bought, it may be held until its rank drops to a
3, 4, or 5.)
Timely Stocks Within Timely Industries
Fourth, pick at least six stocks that are in
the top-ranked industries. Then, if possible, pick at least four or more stocks
-- either those that also have Safety ranks of 1 or 2 and are within the top 12
industries or those that ranked 1 or 2 for Timeliness or Safety, even though
the industry isn't top ranked. To narrow the list, follow steps five through
seven. Remember that the suggested diversification is ten or more stocks.
The Big Picture
Fifth, read the industry comments that precede the
stock report to see the big picture of the long-term growth patterns of earnings
and values for stocks in the industries you are interested in.
Sixth, from the stocks selected so far, choose
those that also conform to your safety requirements.
If you are a conservative investor, or if you think the
market is headed lower, give preference to stocks ranked 1 or 2 for Safety.
If you are bullish on the market and are willing to buy more
volatile, or riskier, stocks, accept those with lower Safety rankings from 3
down to 5.
A low safety rank may be acceptable when the market is
undervalued. At such a time, riskier stocks are usually depressed. Since they
are apt to be more volatile, they are capable of rising faster when confidence
in the market is restored.
Seventh, select from the remaining choices
stocks that meet your current dividend requirements. Dividends for the coming
year are shown in the Summary & Index and on Ratings &
Reports pages, as well as many screens and articles that appear in Selection
& Opinion. Bear in mind that it may be difficult to find a stock that
is ideal on all counts. It may be necessary to make certain concessions,
accepting a lower dividend yield, depending upon the relative importance of
your various goals. For example, conservative investors may at times have to
select stocks ranked 3 for either Safety or Timeliness.
How Timeliness Rankings Change
There are several circumstances that may cause a stock's Timeliness rank to change. This includes:
The release of a company's earnings report. A company that reports earnings which are good relative to those of other companies may have its stock moved up in rank, while a company reporting poor earnings could see its stock's rank drop.
A change in the price of a stock can also cause a stock's rank to change. A change in price carries less weight than a change in earnings, but it is still an important determinant. Generally speaking, strong relative price performance is a plus, while negative relative price performance is a minus (relative to all other approximately 1,700 stocks).
The "Dynamism of the Ranking System." This phrase means that a stock's rank can change even if a company's earnings and stock price remain the same. That's because a fixed number of stocks are always ranked 1, 2, etc. Every time one stock's Timeliness rank moves up or down, another's must also change. As an example, let's suppose one company reports unusually good earnings, causing its stock's Timeliness rank to rise from 2 to 1. Since there can be only 100 stocks ranked 1, some other stock must fall to a rank of 2, even though there has been no change in its earnings or price.
Value Line also ranks stocks for Safety by analyzing
the total risk of a stock compared to the approximately 1,700 stocks in the
Value Line universe. Each of the stocks tracked in The Value Line Investment
Survey is ranked in relationship to each other, from 1 (the highest rank)
to 5 (the lowest rank).
Safety is a quality rank, not a performance rank, and
stocks ranked 1 and 2 are most suitable for conservative investors; those
ranked 4 and 5 will be more volatile. Volatility means prices can move
dramatically and often unpredictably, in either direction.
The major influences on a stock's Safety rank
are the company's financial strength, as measured by balance sheet and
financial ratios, and the stability of its price over the past five years.
Value Line provides a Technical rank for each stock as a
predictor of short term (three to six months) price changes. Like the other
Value Line ranks, this one is relative, assigning scores to each stock tracked
in The Value Line Investment Survey in relation to the others, from 1
(the highest rank) to 5 (the lowest rank).
The rank itself is based on a proprietary model which
evaluates 10 price trends over the past year.
Every Value Line page contains a written commentary, describing the analyst's assessment of how the stock will perform in the future. The text section provides an opportunity for the analyst to:
Evaluate and interpret the data that's available
Explain the factors that he or she thinks are important to the forecast
Provide relevant additional information
The analyst's commentary is especially useful when the sales or earnings numbers don't tell the full story about a stock's performance, or when a new trend is emerging. For example, a stock might have a low Timeliness rank, but the analyst may have reason to believe that earnings will turn around in the near future.
The reverse could be true as well. The analyst might caution investors about earnings surprises, expected management changes or other factors that might make a stock less desirable than its recent history might indicate.
The commentary is the forum for explaining why conditions are likely to change, and giving the reader insight into why these changes will happen.
A wide range of financial data is presented in the statistical section in the center of each Value Line page. The numbers to the right in bold typeface are estimates made by Value Line's security analysts. These estimates cover a wide variety of items, some of which are:
Sales, Earnings, and Dividends Per Share
Annual Price/Earnings Ratios and Dividend Yields
Total Sales, Net Profit Margins, Long-term Debt and Shareholders' Equity
In most cases, estimates are made for the current year, the next year, and the period out 3 to 5 years.
Historical Financial Data
The center section of every Value Line page, known as the statistical array, contains a wide range of historical performance information for a company and its stock.
Some of the historical information is reported for as much as 17 years into the past, some for 12 years, and the balance for 10 years, provided in each case that the company has been in operation that long.
The data include ratios such as the operating margin, net profit margin, and return on shareholders' equity.
This information helps identify trends in the company's performance. The trends are important because they show whether there has been a consistent pattern across a number of different areas, including sales, earnings, operating and profit margins, and return on equity.
You can use this data to do your own analysis of a stock's potential and to help determine whether or not you want to add it to your portfolio.
Annual Rates (of Change)
Value Line provides historical data and projects future performance for five key measures of a company's current financial health and estimated growth potential.
This capsule summary of important indicators gives you, at a glance, an overview of how a company has been doing and how it is likely to perform in the future.
This data, which is usually positive but can also be negative, is expressed as an annual compound rate of change over the past 10 years and the past five years as well as projected rates three to five years into the future.
The measures are:
Sales - Gross volume less returns, discounts, and allowances; net sales.
Cash flow - The total of net income plus non-cash charges (depreciation, amortization, and depletion) minus preferred dividends (if any).
Earnings - A company's total profit before non-recurring gains or losses, but after all other expenses.
Dividends - A payout to shareholders determined by the Board of Directors.
Book value - Net worth (including intangible assets), less preferred stock at liquidating or redemption value, divided by common shares outstanding.
A Target Price Range appears in the upper right portion of each Value Line report, in the same section as the stock price graph. It shows the range in which Value Line's analyst thinks a stock's price is most likely to trade in the three- to five-year period indicated just above.
The Top Horizontal Line indicates the highest level at which the stock is likely to trade in the three-year period.
The Bottom Horizontal Line indicates the lowest level at which the stock is likely to trade in the three-year period.
The Target Price Range is based on information available to an analyst at the time a new report is written, but could obviously change in the future. The data is the same as that appearing in the PROJECTIONS box to the left of the graph. (see Projections)
The stock price PROJECTIONS box appears in the upper left of every Value Line report, just below the stock ranks. This shows:
The most likely high and low price of a stock in the time period specified.
The percentage gain (or loss) if the high or low prices are reached.
The total compound annual rates of return to shareholders (including dividends) if the forecast prices are attained.
The price projections are derived from the forecasts of earnings per share and price/earnings ratios shown in the far right column of the large statistical section. They are based on the best information available at the time a report is written and, obviously, may change in the future.
Earnings per share is the amount of a company's profit or
net income after taxes attributable to each of its common shares outstanding.
The price of each share is its value based on the last public sale of a share.
The ratio between them, or the price divided by the earnings, is the stock's
For example, if ABC Corp's share price was
$22.50 and its earnings per share $1.25, the P/E ratio would be 18. If its
earnings were $1.50 and its price $22.50, then its P/E would be 15. And if its
earnings were $1 and the price $22.50, its P/E would be 22.5.
There is no "right" or "wrong" P/E, but
there is a current median P/E, or midpoint of the ratios of all the stocks
Value Line tracks for The Value Line Investment Survey. The median is
shown each week on the front cover of the Summary & Index section. On March
8, 2013, for example, that median was 16.1. That means that roughly half of all
stocks in The Value Line Investment Survey had a higher P/E and half had
a lower P/E as of that particular date than the median.
In general, buyers will pay higher prices and
accept a higher P/E to own the stock of a company whose earnings they believe
will grow at a faster rate than those of the average company. In fact, one of
the fascinating things about investors is that they are often willing to pay
high prices for certain "hot" stocks that have low, or even no,
earnings on the anticipation that they will be money makers in the future. The
reverse is also true.
Compute a P/E Ratio
Value Line computes the P/E ratio that appears at the top of the Value Line page (highlighted) using the current price and an earnings figure that typically includes six months of past performance and six months of anticipated earnings based on the analyst's assessment of current data. In contrast, a trailing P/E is a ratio of the current price to the past year's worth of reported data.
A trailing P/E, which is the number usually reported in the
financial press, can sometimes be misleading if you're considering buying a
stock, because it does not give you information about future expectations. A
company whose earnings are about to fall might appear to be selling at a modest
P/E based on reported data. But if, in fact, the company reports a big drop in
earnings in the near future, the price may also drop and any advantage offered
by the modest P/E will disappear. That is the type of information a Value Line
analyst is alert to, and the information can influence a P/E that includes six
months of projections.
Value Line also provides the 10-year median P/E that puts
the recent P/E in historical perspective. This information shows what investors
have been willing to pay for a stock in the past. If the current P/E is higher
than that median, it suggests that investors are optimistic that the company's
earnings will grow.
Remember, though, that general economic
conditions and the momentum of the stock market itself also exert a major
impact on stock prices and therefore on P/E ratios. If valuations in general
are high, a company's current stock price may be higher than it might be in
more "normal" times.
Using P/E Information
You can use the P/E as a factor to help evaluate whether or not to buy a particular stock at a particular time.
If you believe that earnings are going up and that the current price/earnings ratio will be maintained, you might want to buy now, because you may benefit from a future earnings increase.
If the earnings estimate is for continued growth but the P/E is already high, you may want to wait for a dip in prices in the market as a whole for an opportunity to buy without paying more than you want to for the stock based on the total return you anticipate.
Stocks of companies whose earnings grow quickly tend to have
higher P/E ratios than stocks of companies whose earnings grow more slowly.
Suppose ABC's earnings had been growing at an annual rate of
13% over the past five years, it was selling at a price of $22.50 a share and
had a P/E ratio of 18. If the company's earnings are expected to jump from
$1.25 this year to $1.50 next year, that would be a 20% growth rate [$0.25 ÷
$1.25 = 20%]. Suppose also that ABC has developed a hot new product and it
appears that the new, stronger rate of earnings will persist for several years?
In that case, investors will probably be willing to pay more
for the stock and be willing to accept a higher P/E ratio than that of the
general market. For example, if the price went up to $30 a share based on
earnings of $1.50 a share, the P/E would be 20 [$30 ÷ $1.50 = 20].
Price/earnings ratios and stock prices can also go down. If
earnings are expected to fall, e.g., to $0.96 a share, investors looking at the
reasons for the weakness may conclude that the company's business prospects
have dimmed. If that happens, the price may slide, perhaps to $11.50, which
produces a P/E of 12 [$11.50 ÷ $0.96 = 12].
A Final Word
Value Line University has provided a basic tutorial for
those getting started with the important responsibility of building their own
investment portfolios. We have introduced you to the tools you need to analyze
the fundamentals underlying the Value Line approach to building a portfolio.
For more knowledgeable investors, the links to various pages of The Value Line
Investment Survey provide more complex and detailed information.
All investors, of course, must always bear in mind that the
market constantly changes, that with change come surprises, and that there is
always risk. Fortunes have been made and lost in the stock market, but over the
long term, the stock market has outperformed all other investment options.
Nevertheless, risk is always there.
And that is why every investor, or potential investor, must
carefully determine his or her risk tolerance and set clear investment goals
that reflect said tolerance. We hope we have shown you how to do just that at
Value Line University.