For example, last week we discussed Value Line's Timeliness Rank, a projection of a stock's expected relative performance in the next six to 12 months.
Value Line also publishes a three- to five-year projected Target Price Range for each equity under its coverage.
When I screened for stocks with a Timeliness Rank of 1 (highest), I wanted to see if there were any stocks that were already trading above Value Line's Target Price Range, three- to five-years hence. This is the sort of exercise that helps give some insight on how to use the program. Indeed, I found some desirable in the short term (Timeliness: 1), but not for a longer-term holding period (the recent price already exceeds the high-end of the price range).
Ian Gendler, executive director of research, explained that the Timeliness Rank is calculated by a computer formula, and all data are actual and known. Analyst estimates and expectations are not included in the rank calculation. There is no connection between Timeliness and the three- to five-year Target Price Range. The same goes for Timeliness and earnings forecasts.
The projected price change is an analyst-derived figure. The analyst creates three- to five-year financial projections, leading to the Target Price Range. The price change from the high and low bounds of the range is then compared with the current stock price.
Once you have a handle on such nuances, you can try any number of screens.
For example, Value Line's appreciation potential gives you a read on the market three to five years hence. If you want to achieve market returns, buying an S&P 500 Index Fund would do the job. If you want to do better, screen for stocks with a higher price target. The results will give you a starting point for further research.
Here are few additional screening tips:
First, don't expect precision in projections, since myriad influences, both individual and market-related, are at work. Should you look for the highest target prices, for example?
Value Line suggests you'd be better off adding a second variable designed to test the credibility of the projections. You could add Earnings Predictability ratings of 65 or higher (on a scale of 0 to 100).
Those stocks will be expected to grow in excess of the projected rate, since they have demonstrated that their earnings patterns are more predictable than approximately two-thirds of the companies under Value Line review.
Second, be sure to compare and contrast. For instance, if you are looking at a stock's price-earnings ratio, compare it with the overall market, the industry and the company's projected rate of earnings growth.
Third, don't set parameters too tightly. For example, if you weed out companies with high debt or low working capital, you may eliminate too many choices. Value Line suggests looking at a company's Financial Strength rating, because it also incorporates analyst judgments about the ability of the company to properly finance its operations.
You can road-test the software through a free seven-day trial by calling 800-531-1425 or going to http://www.valuelinepro.com/Sign-Up/.
You also can sign up for Market Focus, a free weekly email newsletter where you will find Value Line's insights on stocks and industries, the current state of markets and updates to Value Line's free Dow 30 company reports. To subscribe, go to http://www.magnetmail.net/actions/subscription_form_vlp.cfm.
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)