Each week, Value Line publishes an estimate for the median price appreciation potential of all 1,700 stocks we cover in the hypothesized environment three to five years hence. The figure has predictive power in gauging how much stocks have to offer for the long term. Value Line’s Median Appreciation Potential (VLMAP) for the 1,700 stocks in our Investment Survey was recently 40%. That is lower than it was both 26 weeks ago, and the 185% at the market low in March, 2009, but matched the level reached at the recent market high in May, 2013.
VLMAP’s performance over time tends to provide a reasonable correlation with market performance. For example, in late June, 2009, the Dow Jones Industrial Average was at the 8,300 level, the Value Line Arithmetic Index was at 1662, and the median appreciation potential was 90%. That suggested the Dow and the Value Line Index would be around 15,770 and 3158, respectively. Now, four years and just over one month later (a bit more than the midpoint of the three to five year measuring period) the Dow is around 15,500 and Value Line’s own index is at 3917. Strictly speaking, the 90% projected appreciation was for Value Line’s 1,700 stock universe, rather than for just the 30 stocks in the Dow. But the VLMAP figure does provide a rough gauge of expected future stock market performance, given that the Dow recently topped out at 15,634. The Value Line Arithmetic Index performed relatively stronger than the Dow, since it included larger percentage gains from smaller capitalization stocks.
Perhaps not surprisingly, estimated appreciation potential often turns out to be greater than what is actually realized. That is usually owing to assumptions that turned out to be too optimistic (a hazard of predicting the future). However, in some periods stock market results actually outpace what had earlier been projected. Outperformance by the markets versus VLMAP tends to occur in bull markets, where recent examples include the late 1990s and the mid-2000s, or times when the economy was strong. On that note, the level of appreciation potential that stocks offer is clearly tied to the economy and where we stand in the business cycle. VLMAP tends to be greatest just prior to the end of a recession, as was the case in 2009.
Value Line’s Median Appreciation Potential is currently pointing to respectable returns for investors. True, the recent 40% figure is on the low end of the historical range. But even that figure equates to nearly a 9% annual compounded gain using the midpoint of the three to five year projection period. Over time, VLMAP has ranged from around 20% in early 1969 to 255% in October, 1974, and the average since 1973 is about 80%. On the plus side is that stocks still have less competition from bonds and cash these days, even though long-term interest rates have begun to edge higher. As noted, too, history suggests that the markets do better than expected during extended periods of bullish sentiment.
Note: Value Line’s Median Appreciation Potential (VLMAP) can be found on page 1 of the Summary & Index, in Part 1 of our flagship Investment Survey, in a box near the middle of the page, next to Price-Earnings Ratios and Dividend Yields.
At the time of this article, the author did not have positions in any of the companies mentioned.