Using research tools, you can develop a screen to weed out stocks that don't meet your needs. An aggressive screen would be different from that of a conservative investor who wants to sleep at night.
The Value Line Investment Survey starts with its universe of 1,700 stocks that make up about 90 percent of the market capitalization of all stocks traded in U.S. markets. Value Line ranks those stocks into quintiles based on three propriety measures called Timeliness, Safety and Technical.
The quintiles place the stocks into five categories so that you can quickly grasp which equities are at the top, bottom and middle of the pack.
For Timeliness and Technical rankings, the very top (Rank 1) and very bottom (Rank 5) each have 100 stocks. The middle (Rank 3) contains 900 stocks, and Ranks 2 and 4 contain 300 stocks apiece. The distribution of Safety Ranks is not arranged in a set parameter.
An aggressive investor would look for stocks ranked 1 or 2 for Timeliness, based in part on recent earnings momentum and stock-price performance. These are stocks that Value Line believes will lead the pack for relative price performance during the next six to 12 months. They tend to be more volatile and have smaller capitalizations than the general market.
Stocks ranked 3 are expected to be "average performers," but still might be quite appropriate for more conservative investors. Stocks ranked 4 and 5 would probably be weeded out by most investors, since those stocks are viewed as being less likely to perform well during the next six to 12 months than the vast majority of the 1,700 stocks.
The Safety ranking is more useful for conservative investors, who will want to search for stocks ranked 1 or 2, while aggressive investors may be happy with 3, 4 or even 5 as long as they keep a watchful eye on the stock.
Safety is based on the company's Financial Strength grade, a measure of the financial condition of the company, as well as the stock's Price Stability, which is based on the stock's volatility (standard deviation of weekly percentage price during the past five years).
Aggressive investors also will want to focus on the Technical ranking, which predicts short-term (three to six months) price changes, based on a proprietary model evaluating 10 recent price trends.
Before choosing stocks that you find in such a screen, you'll want to study the company's financials. Value Line provides key datasets for different time periods, including projections for the future for sales, cash flows (net income), earnings (profits after expenses and taxes), dividends (payout to shareholders) and book value (net worth).
Value Line also computes a Target Price Range, which is Value Line's opinion on where the stock will likely trade in three to five years.
In case you're wondering if you can screen for stocks ranked 1s for all three rankings, that's an unlikely combination. The same is true for the worst-ranked stocks (all 5s).
How successful is Value Line's ranking system? According to Ian Gendler, executive director of research: "Our ranking system for Timeliness has been forecasting the relative price performance since 1965, and over that span, the favorably ranked equities have easily outperformed the major market indexes."
Another way to screen is to start with industries instead of individual stocks. Value Line ranks the 97 industries that make up the market on a scale of 1 to 97, with 1 being the best. In order to derive the industry rank, Value Line takes the individual rankings for each stock, averages them out and compares them against each of the other evaluated industries. Value Line suggests picking at least six industries that are the most timely, those ranked 1 through 6.
The six top-ranked industries right now are Home Building, Foreign Electronics, Thrift, Precious Metals, Insurance (Life) and Banks (Midwest).
You can try your own screens online by signing up for a free trial at www.valueline.com. You can read "The In-Depth Guide to Reading a Value Line Research Report" at www.juliejason.com.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org).