One of the principal attractions of a Value Line report is the wealth of data provided regarding a company’s past financial performance. Much of this can be found in the Statistical Array at the heart of the standard Value Line Investment Survey page. There, investors can quickly get a sense of historical trends, frequently stretching back a decade or more, for many closely watched metrics, such as revenues, earnings, price-to-earnings ratios, and debt levels. (The categories included vary depending on the particular industry in which a company operates.)
Investing, though, also necessarily involves making assumptions about what the future might hold for a company and how this figures to affect its stock price performance. On the extreme right-hand side of the Statistical Array, readers can find our analyst’s take on what a company’s financial performance might look like three to five years hence. (Estimates can be distinguished from actual data by their bold typeface.)
These projections form the basis for a stock’s Target Price Range, which is found in the upper right hand section of each report. This represents the range in which the price is likely to fall 3 to 5 years into the future (currently, the 2013-2015 timeframe). The center point of the range roughly corresponds to an analyst’s projections in the period 3 to 5 years out for earnings per share multiplied by the estimated Price/Earnings ratio for the same period. The width of the high-low range depends on the stock’s Safety rank. Stocks with a high Safety rank (1 being the Highest) have a narrower projected range than those with low ranks (5 being the lowest).
A stock’s Target Price Range can also be found on the top left hand side of the page immediately below its Timeliness, Safety, and Technical Ranks. There, in addition to the potential high and low prices we forecast, you can also find the percentage price changes we project and the expected compound annual total returns (price appreciation plus dividends). To make these calculations, the expected prices 3 to 5 years out (as shown in the Target Price Range and the Projections Box) are compared with the recent price shown at the top of the page.
The Target Price Range and 3- to 5-year Projections are based upon an estimate of future earnings. They are, therefore, very subjective, requiring analysts to make assumptions about, among other things, the course of the economy, industry specific developments, and the prospects for success of a company’s strategic initiatives. Still, these projections can be a useful tool for investors when used in conjunction with our Timeliness, Technical, and Safety Ranks. Those with a long-term focus for instance will want to consider whether a stock with a high Timeliness rank, suggesting good prospects for outperforming the broader market in the year ahead, is likely to have the stuff to provide above-average returns for shareholders over an extended time frame. Too, investors may be wish to keep an eye out for potential diamonds in the rough from among those stocks that are now out of favor in the market, and likely to have a low ranking for Timeliness.
Investors whose primary goal is long-term price appreciation should study the 3- to 5-year projections carefully and choose from among those stocks with above-average appreciation potential. For comparative purposes, you can find the Estimated Median Price Appreciation Potential for all approximately 1,700 stocks on the front page of the Summary & Index each week. Over the past 20 years, median appreciation potential for the Value Line universe has occasionally slipped as low as 35%. Interestingly, the latest instance was in mid-2007 when some market benchmarks were flirting with their all-time highs. At the other end of the spectrum, median appreciation potential has only infrequently risen above 100%, though it was usually above this mark for an extended period between October 2008 and April 2009, which roughly correspondents to the depths of the recent bear market.
Meanwhile, we would caution that choosing individual stocks with the highest appreciation potential frequently entails some trade-off between risk and reward. A recent screen of the 1,700 stocks covered by Value Line seemed to conform to this view. Those with appreciation potential above 170% (about 100) scored noticeably lower on Price Stability (median: 20) than was the case for the broader market (median: 50). Many of the companies that made this list (about one-third) were also likely operate in the red this year.
