S&P vs. Value Line: Stock rankings' main event

ANNANDALE, Va. (CBS.MW) -- The newsletter world has its own version of the apocryphal battle between man and machine.

And so far, it looks like machine is winning.

In one corner, representing machine, is Value Line Inc., publishers of the Value Line Investment Survey (www.valueline.com).

The famed Value Line stock rating system, which each week ranks 1,700 widely followed stocks according to their prospects over the coming year, is entirely mechanical.

No subjective judgment is involved in deciding whether a stock should be placed in Value Line's Group 1 (the firm's best bets for performance over the subsequent year).

In the opposite corner, representing man, is Standard & Poor's Outlook (www.spoutlookonline.com), which has a five-tiered stock ranking system of its own known as S&P's STAR ranking system.

In contrast to Value Line's, this ranking system depends in the final analysis on the judgment of S&P analysts.

Standard & Poors is an able opponent in this battle because, if any research organization is able to beat Value Line's "machines," S&P ought to be it.

In my 22-plus years of monitoring the performance of the newsletter industry, I've never heard anything but praise and respect for S&P and the belief that their analysts are top-notch.

And yet, since January 1989, when the Hulbert Financial Digest started monitoring the performance of S&P's STAR ranking system, it has lagged Value Line's.

In fact, according to Hulbert Financial Digest research, the average Value Line top-ranked stock has outperformed the average S&P top-ranked stock by more than 3 percentage points per year on an annualized basis (i.e., 13.0 percent compared to 9.7 percent, respectively).

By way of comparison: Over this same period, the Wilshire 5000 produced a 10.2 percent annualized return.

Though machine thus is winning out over man, we don't necessarily have to choose between them. Investors may want to focus on which stocks are top-ranked by both systems -- especially given that while S&P ranking system modestly lagged the broad market, it nevertheless outperformed the average newsletter or mutual fund over this nearly 14-year period.

Doubly blessed

For the record, I haven't back-tested the performance of such a marriage of these two venerable ranking systems. But for those who want the best of both man and machine, listed below are the 17 stocks that currently are top-ranked by both:

H&R Block (HRB) ; Chico's FAS (CHS) ; Constellation Brands (STZ) ; Dean Foods (DF) ; Electronic Arts (ERTS) ; Fortune Brands (FO) ; Hovnanian Enterprises (HOV) ; KB Home (KBH) ; Lennar (LEN) ; Moody's Corp. (MCO) ; P.F. Chang's China Bistro (PFCB) ; Procter & Gamble (PG) ; Sysco Corp. (SYY) ; Tenet Healthcare (THC) ; UnitedHealth Group (UNH) ; Varian Medical Systems (VAR) ; and WellPoint Health Networks (WLP)

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980. To view the original article, please click here.