Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Dissecting the Value Line Graph
A look near the top of a Value Line research report shows an information-filled box containing, among other things, a graph of the stock price. Historical stock price data go back 12 years (if the stock has been trading that long), in addition to the current 12-month period, and is shown in terms of monthly price ranges. In other words, a longer vertical hash mark indicates the shares had a bigger swing that particular month. It’s also worth pointing out that price ranges are plotted on a ratio scale to show percentage changes in true proportion. For example, a per-share move in price from $5 to $10 looks the same as a $50 to $100 rise on a ratio scale. At the top of the graph section are the stock’s highest and lowest prices for each year. At the bottom, vertical lines indicate the number of shares traded monthly as a percentage of the total outstanding.
Accompanying the stock price in the graph is the "cash flow" line, or the "Value Line". The Value Line consists of two components. The first is cash flow per share (reported earnings plus depreciation less any preferred dividends, divided by the number of common shares at yearend). That figure is then multiplied by a number selected to connect cash flow per share with the stock’s past price action and its projected target price range. Stocks trading above their "Value Line" may be considered pricey, while those changing hands below are likely trading at bargain valuations for some reason. Making the Value Line fit both past stock price action and expected future performance sometimes requires analyst discretion. That’s because stocks are typically valued more highly when they are in a growth phase; companies often change their makeup over time, and general market volatility must also be considered.
Below the stock price line and the Value Line is Relative Price Strength, depicted by an unconnected dotted line. Relative Price Strength shows the stock’s performance compared to the Value Line Composite of 1,700 stocks. A rising relative price strength line means the stock has been doing better than the market, and vice-versa.
Near the top left corner of the graph section is the legends box, which lists the cash flow multiple used to calculate the "Value Line" and provides the visual key to the Relative Strength line. Other housekeeping items include the number and type (e.g. 2-for-1) of splits a stock has had in recent years and the dates they occurred. Stock splits are also shown along the price line itself, where there is room beyond the legends box. We also indicate in the legends box whether options on the stock are traded, and denote that shaded areas indicate recessions.
Next up is the % Total Return Box at the bottom on the right of the graph section. Total return is calculated by taking the stock price, adding accumulated dividends, and dividing by historical stock prices for the one, three, and five-year periods. We assume reinvestment of regular dividends, but not special dividends. As a comparison, we show how the Value Line Arithmetic Index has fared over the same time periods.
Last, but not least, in our discussion is the stock’s projected 3- to 5-year Target Price Range on the right side of the price chart (it matches up numerically with the Projections box to the left of the Price Chart). The mid-point of the Target Price Range can be figured out by multiplying the stock’s projected 3- to 5-year earnings per share by its assumed price-earnings ratio out to that time. We add a safety factor to determine the range. The Target Price Range gives investors an idea of what to expect in terms of price appreciation potential if expected profits and the valuation assumed are close to the mark.