Value Line Ranking System
The Best of the Foolish Workshop
Jim Stevens is off this week on vacation. In his absence, we've chosen a past column that represents some of the "Best of..." here in the Workshop. Tonight's column is a reprint from March, when Robert Sheard discussed the history of Value Line and its ranking system. Many Fools new to the Workshop ask questions about why we use Value Line. Here's the answer. Enjoy!
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LEXINGTON, KY. (March 16, 1998) -- Last week a reader on our AOL message board asked me to look at Value Line's recent results and comment. So today let's update the screen we use for so many of our Workshop experiments.
Value Line began its ranking system for Timeliness (which attempts to predict relative performance over the coming 12 months) on April 16, 1965, so we're fast approaching the end of its 33rd year.
In 1997, the system didn't have its greatest performance, but neither did many growth-style investors (just look at Unemotional Growth's deplorable returns). The frozen record (holding the stocks from the beginning of the year for the full 12 months) for the top-ranked stocks produced a gain of 25.8% versus the 33.4% of the Standard & Poor's 500 Index. But the unfrozen record (allowing for weekly changes in rankings) did even worse, which is rarely the case. The unfrozen record only gained 11.3%.
Nevertheless, the long-term record is still stunning. The frozen record has now gained a total of 13,315% since inception. That equates to a 16.2% annualized return for the top 100 stocks.
The unfrozen record, however, has far surpassed that, generating gains since inception of 48,856%, or an annualized growth rate of 20.83%. In fact, if you compare the Timeliness ranking system versus other market strategies like Low Price to Sales, Low Market Capitalization, Low Price to Book Value, and Low Price to Earnings, the Value Line Group 1 stocks have vastly outperformed since 1966. As Research Chairman Samuel Eisenstadt commented, "How's that for a random walk down Wall Street?"
In recent years, Value Line has also begun tracking three model portfolios using different screening strategies. But none of them has beaten the S&P 500 Index since their inception on 4/28/95.
Portfolio I (Stocks for Performance) chooses stocks that carry a 1 for Timeliness and a Financial Strength Rating of at least B+. If a stock's Timeliness ranking falls below 2, it is automatically removed. From within the qualifying stocks, manager Charles Clark can choose as he sees fit. Last year this portfolio gained 31.8% compared to the S&P 500's 33.4%. Since inception it has a total return of 78.1% versus the S&P 500 Index's 99.7%. That's an annualized rate of 24.04% versus the market's 29.45%.
Portfolio II (Stocks for Performance and Income), has fared the best of the three models. To qualify for this portfolio a stock must have a dividend yield in the top half of the Value Line universe, a Timeliness ranking of 1 or 2 (unranked stocks may be selected occasionally), and a Safety Rank of 3 or better. If a stock's Timeliness or Safety falls below 3, that stock will be removed automatically. Jonathan B. Chappell manages this portfolio. Last year it returned 32.7% and since its inception it has returned 97.1%, an annualized return of 28.82%.
Portfolio III (Long-Term Growth) fared the best in 1997, equaling the S&P 500's return of 33.4%. Since inception, the portfolio has returned 81.7%, an annualized rate of 24.97%. To qualify for this portfolio a stock must have worthwhile and well-defined 3- to 5-year appreciation potential. It should also have a Timeliness Rank and a Safety Rank of at least 3. (Occasionally a stock will be unranked, usually because of a short trading history or a major corporate reorganization.) If the required qualifications are no longer met, a stock will be removed. Keith E. Ferguson monitors this portfolio.
So there you have it, an update on the Value Line ranking system with nearly 34 years of real-time performance under its belt. Last year was a bit disappointing, but in the past weak years have often been preludes to good ones. We'll keep watching, of course.
New Rankings
| 1998 Returns
| New Database