Bank of America (BAC – Free Bank of America Stock Report) has not been performing very well since the financial crisis. That event, spurred largely by home mortgage issues, has taken this giant bank’s shares from a high price of $55, reached in 2006, to a low of just $2.50 in 2009 (the high and low prices for each calendar year are displayed above the Graph). The shares recently traded hands in the high single digits (shown in the Top Label section that runs across the top of every Value Line report).
Earnings, meanwhile, took a similar nosedive and have yet to recover. In fact, 2011 was the first year of profitability after two consecutive full-year share net losses. And the single penny the company earned is not exactly a result that one can get overly excited about. The company’s less-than-stellar record on this front is clearly detailed in the historical portion of the Statistical Array.
Bank of America is something of an extreme example, but it points out that the wealth of information contained in a Value Line report can tell a stock’s story pretty well. That said, examining the stock reports of each of the approximately 1,700 companies under Value Line review could get fairly time consuming. That’s where statistics, and a lot of human ingenuity, can help.
Value Line’s well-known Timeliness and Safety Ranks (both found in the Ranks box) are examples of using statistics (and human ingenuity) to take a lot of information and boiling it down to an easy-to-use method to distinguish between stocks. However, there are four other proprietary measures created for each company Value Line covers that provide a bit more granularity that deserves attention: Financial Strength, Stock Price Stability, Price Growth Persistence, and Earnings Predictability. All of these can be found in the Ratings box at the bottom right of each report.
The Safety rank is a measure of the potential risk associated with an individual common stock. It is a “big picture” view of a company’s risk. Safety ranks range from 1 (Highest) to 5 (Lowest). The Safety Rank, however, is computed by averaging two other proprietary indexes, the Financial Strength rating and the Price Stability Index.
The Financial Strength rating is a relative measure of the financial strength of the companies reviewed by Value Line. The relative ratings range from A++ (Highest) to C (Lowest), in nine steps. They are assigned by Value Line’s team of analysts and editors based on such factors as debt load, company size, and earnings history, among others. These ratings are reviewed quarterly and changes are not made lightly. Bank of America currently earns an uninspiring rating of B. Although far from the worst possible rating, it isn’t a ringing endorsement of the company’s finances.
The second part of the Risk rank is Stock Price Stability. This measure is purely statistical and based on known data. For the more mathematically inclined, it is a relative ranking of the standard deviation of weekly percent changes in the price of a stock over the past five years. The ranks go from 100 for the most stable to 5 for the least stable. In plain English, companies with more stable share prices get a better score here. Bank of America earns a lowly score of 10—the reason for this should be clearly evident from the Graph.
Combining these two measures makes the Safety Rank a nice compromise between investment art and science—putting together the human world with the computer world. At the “big picture” level, Bank of America’s Safety Rank is 4 (Below Average).
The other two measures found in the Ratings box are Earnings Predictability and Price Growth Persistence. Earnings Predictability provides a measure of the reliability of an earnings forecast. Predictability is based upon the stability of year-to-year earnings comparisons, with recent years being weighted more heavily than earlier ones. Like Price Stability, the ratings go from 100 to 5. The rating is derived from the standard deviation of percentage changes in quarterly earnings over an eight-year period. Special adjustments are made for comparisons around zero and from plus to minus. Bank of America’s Earnings Predictability score is a below par 30. The string of mixed to poor results since the financial crisis is the obvious reason behind this weak score.
Price Growth Persistence, the last measure, examines the historical tendency of a stock to show persistent share price appreciation over the trailing 10-year period compared to the average stock. Like Earnings Predictability and Price Stability, this rating goes from a high of 100 to a low of 5 and is based only on known data. Note that this isn’t a measure of the size of the change, as it only tracks the regularity with which a stock’s price has gone up. Bank of America’s Growth Persistence score scrapes the bottom at 5. A look at the Graph is all that is needed to understand why this score is so low.
So, if everything that you can learn from these proprietary measures can be seen by looking at all the information on the Value Line report, why bother with them? The reason is simple, it is easier to check these numbers first to screen out candidates many investors may not want to consider (such as Bank of America) before taking the time to look through all of the data on the page to differentiate between more desirable investment candidates. In fact, using Value Line’s online screening tools, you can cut out poor scores in a matter of seconds, leaving you with even more time for constructive research.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.