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How to Invest Using a Value Line Report: A Focus on Safety Exxon Mobil, Alcoa, and GE
One of the things that Value Line prides itself on is being able to serve the needs of investors across virtually every investment style. The wealth of information, from raw statistics to key ratios to proprietary Value Line Ranks and Ratings, squeezed into each report is, according to Charlie Munger, Warren Buffett’s right hand man at Berkshire Hathaway (BRKA), a “human triumph.”
So, Value Line can help investors looking for growth, value, and income. It can help investors looking to focus on specific industries or those who like to run stringent statistical screens (users can create custom screens online or review preset screens in the Index of the printed product). One valuable thing about Value Line reports that often gets overlooked, however, is the many tools that can be used to ascertain the inherent risks of an investment.
Indeed, many investors know their stylistic approach and process, but don’t pay as much attention to their risk profiles. Finding a fabulous growth (value, income, turnaround, etc.) stock is a wonderful thing, but what’s the benefit if you can’t own it and sleep at night? Risk should be integral to any investment process.
On the risk front, the first thing to look at on a Value Line stock report is the Safety rank. This rank appears in the Ranks box at the top left of all Value Line equity reports and is a measure of the potential risk associated with an individual common stock. Think of this proprietary rank as a “big picture” view of a company’s risk. Safety ranks range from 1 (Highest) to 5 (Lowest).
The date and direction (raised or lowered) of the last Safety Rank change is listed next to the current Rank. Once in place, a Safety Rank tends to remain in place for a long period of time. Note that on the Coca-Cola (KO – Free Value Line research report for Coca-Cola) report the last change was in 1990, when the rank was raised to a 1 (Highest). General Electric (GE – Free Value Line research report for General Electric), meanwhile, saw its Safety rank lowered to a 3 in 2009 when it became apparent that the financial turmoil of the time was taking an excessive toll on the company’s finances. A toll Value Line doesn’t believe the company has yet fully repaired.
The term “big picture” when discussing Safety Rank makes particular sense because the Safety rank is computed by averaging two other proprietary indexes, the Price Stability Index and the Financial Strength rating. Both of these measures are found at the bottom right of a Value Line report in the Ratings box.
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) down 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.
Stock Price Stability 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. This measure is purely statistical and based on known figures.
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. The interesting thing is that the rank, and its two constituents, can be used to fine-tune any portfolio. For example, if you were looking for a natural resources investment and came across Exxon Mobil (XOM - Free Value Line research report for Exxon Mobil) and Alcoa (AA - Free Value Line research report for Alcoa) as two potential options, you might next examine their risk profiles.
At the “big picture” level, Exxon Mobil has a Safety Rank of 1 (Highest) while Alcoa earns a 3 (Average). Clearly, more conservative investors should favor Exxon. That said, what makes up those ranks?
Exxon earned a Financial Strength Rating of A++, the best possible, and Alcoa earned a B+, which is about average. The big differentiating factor, however, is Stock Price Stability. Here, Exxon scores 100, while Alcoa scores a fairly low 35. That suggests that investors with moderate risk profiles should look elsewhere because they could be in for a bumpy ride. Clearly, there are other factors that go into any stock purchase, but this quick example shows how these three proprietary tools can be used to educate your broader investment process.
Few investors will use term “conservative” or “aggressive” as their sole investment attribute, preferring specific styles, such as growth, value, or income. But one’s risk profile is part and parcel to investing and should be a part of every investor’s self awareness. Value Line reports give you the tools to choose your investment approach and to tailor that approach so it fits your risk profile.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.