The following is an update to the evaluation of our 3- to 5-year price appreciation potential. The results of this study were first published in November 2002, with subsequent updates furnished in February 2005, January 2006, January 2007, January 2008, and February 2009. The original article and accompanying chart detailed the methodology behind our evaluation and discussed some of the more interesting results. For the benefit of our readers, we briefly review the methodology used for this analysis.
Price Appreciation Potential
The estimate of the median price appreciation potential is found by first calculating the percentage change between the current price of each stock in our universe and the middle of its 3- to 5-year Target Price Range. These figures are then arrayed, and the median price appreciation potential is determined. We select the median of the array (the middle) as the most likely price, in order to play down the effect of outliers, that is, excessively large or small percentage price changes.
The chart included below depicts the results of those projections from 1983 to 2009, using the Value Line Arithmetic Index as our measure of the market. The actual price is taken as the average of the middle year of the 3- to 5-year forecast, so that a projection made at the end of 1983 would be compared to the average price of the index in 1987. Accordingly, we are comparing actual results to a 3 ½ year forecast.
Update for 2009
Our estimate for the year 2009 (made at the end of 2005) was 2683. The average price of the Value Line Arithmetic Index in 2009 was 1758. The large deviation arises from the effects of the recession that followed in the wake of the financial turmoil in late 2008 and early 2009. Meanwhile, the average deviation between the projected and actual average prices during this period was 18% (ignoring signs). The median deviation during this period was 11%. The projection for 2013 now stands at 3500. The 4-year projected price of 3500 now stands at 40% above the current level—suggesting respectable returns for patient investors.