Performance of The Value Line® Ranking System

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Stocks

The Value Line Investment Survey® is probably most famous for its time-tested Ranking System for Timeliness™, which ranks approximately 1,700 stocks relative to each other for price performance during the next six to 12 months, and Safety™ . The Value Line Technical Rank is designed to predict stock price movements over a three to six month time period. In each case, stocks are ranked from 1 to 5, with 1 being the highest ranking.

Note: Any one Value Line stock rank is always relative to the ranks of all other stocks in the Value Line universe of approximately 1,700 stocks.

The Value Line Timeliness Rank

The Value Line Timeliness Rank measures probable relative price performance of the approximately 1,700 stocks during the next six to 12 months on an easy-to-understand scale from 1 (Highest) to 5 (Lowest). The components of The Value Line Ranking System for Timeliness include factors such as the 10-year trend of relative earnings and prices, recent earnings and price changes, and earnings surprises. All data are actual and known. A computer program combines these elements into a forecast of the price change of each stock, relative to all other ranked stocks for the six to 12 months ahead. The Value Line universe of 1,700 stocks accounts for approximately 90% of the market capitalization of all stocks traded on the U.S. exchanges.

Ranks example
  • Rank 1 (Highest): These stocks, as a group, are expected to be the best performers relative to the Value Line universe during the next six to 12 months (100 stocks).
  • Rank 2 (Above Average): These stocks, as a group, are expected to have better-than-average relative price performance (300 stocks).
  • Rank 3 (Average): These stocks, as a group, are expected to have relative price performance in line with the Value Line universe (approximately 900 stocks).
  • Rank 4 (Below Average): These stocks, as a group, are expected to have below-average relative price performance (approximately 300 stocks).
  • Rank 5 (Lowest): These stocks, as a group, are expected to have the poorest relative price performance (100 stocks).

Changes in the Timeliness Ranks can be caused by:

  1. New earnings reports or company forecasts.
  2. Changes in the price movement of one stock relative to the approximately 1,700 other stocks in the publication.
  3. Shifts in the relative positions of other stocks.

Record of the Value Line Timeliness Rank

Our performance record is discussed here and shown below. The first shows that our 1-ranked stocks had appreciated 49,440%* (before commission costs and before dividends) between April 16, 1965 and December 31, 2013. That compared with a gain of 1,718% for the Dow Jones Industrial Average. That is, if you consistently owned the one hundred stocks ranked number one out of the total of approximately 1,700, the portfolio, as a whole, would have appreciated more than 49,000%. The second graph shows that if you bought all our 1-ranked stocks at year end of each year, held them until the next year end, and then set up a new portfolio of 1-ranked stocks at the end of each subsequent year, the portfolio would have risen 28,586%** since 1965. These are records we believe nobody else has ever matched.

* Allowing for Changes in Rank each week - geometric averaging
**Allowing for Annual Changes in Rank - arithmetic averaging
Record-of-Timeliness-Ranks-Dec2013

Making Changes Weekly

Value Line has been calculating changes in the Timeliness Rank on a weekly basis for more than 48 years and has been publishing the results in Value Line Selection & Opinion. The record of weekly performance is outstanding and is shown in the chart and table below. There you can see just how stocks ranked 1, 2, 3, 4, and 5 for Timeliness have done, assuming that all rank changes were implemented each week.

What you can clearly see is that there have been spectacular results not only for stocks in Groups 1 and 2, but also, in reverse, for those in Groups 4 and 5. You can see that our evaluations for Timeliness are equally effective in showing both good stocks to seek and poor ones to avoid.

Stocks ranked 1 or 2 for Timeliness cannot be expected to outperform the market in every single week or month. But over a longer period, they may be predicted to do so as a group, as our actual results demonstrate.

Timeliness-Allowing-for-Changes-Each-Week-chart-Dec2013 Timeliness-Allowing-for-Changes-Each-Week-data-2013Dec Timeliness-Allowing-for-Changes-Each-Week-since1989-chart-2013Dec Timeliness-Allowing-for-Changes-Each-Week-since1989-data-2013Dec

Making Annual (Once a Year) Changes

Most investors do not buy and sell stocks every week. Doing so could result in large commission costs and a material tax liability, not to mention the time and effort such frequent trading requires. For these reasons, we have also regularly published a record of the results of annual changes in The Value Line Ranking System for Timeliness. In what we call the "Frozen Record," we assume that investors buy stocks on the last business day of each year and hold them until the last day of the next year. Here, too, the top groups have consistently surpassed the growth of the other groups.

Timeliness-Allowing-for-Annual-Changes-chart-2013Dec Timeliness-Allowing-for-Annual-Changes-data-2013Dec

The Value Line Safety Rank

A second investment criterion is the rank for Safety that is assigned by Value Line to each of the approximately 1,700 stocks. This rank measures the total risk of a stock relative to the approximately 1,700 other stocks. It is derived from a stock’s Price Stability index and the Financial Strength rating of a company, both shown in the lower right hand corner of each page in Value Line Ratings and Reports. Safety ranks are also given on a scale from 1 (Highest) to 5 (Lowest) as follows:

  • Rank 1 (Highest): These stocks, as a group, are the safest, most stable, and least risky investments relative to the Value Line universe.
  • Rank 2 (Above Average): These stocks, as a group, are safer and less risky than most.
  • Rank 3 (Average): These stocks, as a group, are of average risk and safety.
  • Rank 4 (Below Average): These stocks, as a group, are riskier and less safe than most.
  • Rank 5 (Lowest): These stocks, as a group, are the riskiest and least safe.

Stocks with high Safety ranks are often associated with large, financially sound companies; these same companies also often have somewhat less-than-average growth prospects because their primary markets tend to be growing slowly or not at all. Stocks with low Safety ranks are often associated with companies that are smaller and/or have weaker-than-average finances; on the other hand, these smaller companies sometimes have above-average growth prospects because they start with a lower revenue and earnings base.

The Record of the Value Line Safety Rank

Safety becomes particularly important in periods of stock market downswings, when many investors want to try to limit their losses. As with Timeliness, the record of Safety over the years is impressive. When you study the data, you will find that stocks with high Safety ranks generally fall less than the market as a whole when stock prices drop. The accompanying table shows how the Safety ranks worked out in all major market declines between 1966 and the present.

The lesson is clear. If you think the market is headed lower, but prefer to maintain a fully invested position in stocks, concentrate on stocks ranked 1 or 2 for Safety. Also, at the same time, try to keep your portfolio ranked as high as possible for Timeliness. You may not be able to find stocks ranked high on both counts. You then must decide which is more important—price performance over the next six to 12 months, or Safety. A compromise involving picking stocks ranked 1 or 2 for Timeliness and 1 or 2 for Safety may be worth considering.

The Penalty and Reward of Risk

A risky stock is one which has low Price Stability and whose price fluctuates widely around its own long-term trend. It may also be a stock of a company with a low Financial Strength rating. One may reasonably assume that the price of a risky stock will go up more than that of a safe stock in a generally strong market. Yet, if in the interim it went down more sharply and you had to sell at an inopportune time, you could suffer a heavier penalty for having bought the high-risk stock instead of the safer one.

High Value Line Timeliness Ranks give some protection against a general market decline, but only over a period of six to 12 months. They cannot be relied upon to help protect against a sharp drop in the stock market in every week or month, as a high Safety rank may do.

10-12-09 Safety Ranks - Value Line Ranking System

Industry Ranks

Value Line also publishes Industry ranks, which show the Timeliness of most all of our 100 Industry groups. These ranks are updated weekly and published on the front and inside pages of the Value Line Summary & Index. They also appear at the top of each Industry Report. The Industry Rank is based on averaging the Timeliness ranks of each of the stocks which have been assigned a Timeliness rank in a particular industry.

Value Line Indexes

On June 30, 1961, we introduced the Value Line Composite Index. This market benchmark assumes equally weighted positions in every stock covered in The Value Line Investment Survey. That is, it is assumed that an equal dollar amount is invested in each and every stock. The returns from doing so are averaged geometrically every day across all the stocks in The Survey and, consequently, this index is frequently referred to as the Value Line (Geometric) Average (VALUG). The VALUG was intended to provide a rough approximation of how the median stock in the Value Line universe performed.

On February 1, 1988, Value Line began publishing the Value Line (Arithmetic) Average (VALUA) to fill a need that had been conveyed to us by subscribers and investors. Like the VALUG, the VALUA is equally weighted. The difference is the mathematical technique used to calculate the daily change.

The VALUA provides an estimate of how an equal-dollar weighted portfolio of stocks will perform. Or, put another way, it tracks the performance of the average, rather than the median, stock in our universe. It can be shown mathematically, for all practical purposes, that the daily percentage price change of the VALUA will always be higher than the VALUG. The systematic understatement of returns of VALUG is a major reason that the VALUA was developed. Moreover, although the differences between daily price changes may seem small, the magnitude of the annual differential between the two averages can be very large. The greater the market volatility, the larger the spread between the geometric and arithmetic averages becomes.

In 1965, when The Value Line Ranking System for Timeliness began, our only market average was the VALUG, so we scored the ranks on a geometric basis. This allowed us to compare the performance of the ranks versus the market (as measured by the VALUG). After we started the VALUA, we began scoring the ranks both on a geometric and arithmetic basis.

Value Line’s Small & Mid-Cap Survey's Performance Ranking System

The Value Line Investment Survey - Small & Mid-Cap has a number of unique features that distinguish it from other publications and make it easier for you to have accurate, timely information so that you may keep up to date on all developments affecting your investments.

Probably the most well-known are Value Line's time-honored Ranking System for Performance and Safety. The Value Line Technical Rank is designed to predict short-term stock price movements. In each case, stocks are ranked from 1 to 5, with 1 being the highest ranking.

Performance Rank

The Value Line Performance Rank measures relative probable price performance of the approximately 1,750 stocks during the next six to 12 months on an easy-to-understand scale from 1 (Highest) to 5 (Lowest). The components of the Performance Ranking System include factors such as the five-year trend of relative earnings and prices, recent earnings and price changes combined with technical ranks. All data are actual and known. A computer program combines these elements into a forecast of the price change of each stock, relative to all other approximately 1,750 stocks for the six to 12 months ahead.

Rank 1 (Highest): These stocks, as a group, are expected to be the best performers relative to the Value Line universe during the next six to 12 months (100 stocks).

Rank 2 (Above Average): These stocks, as a group, are expected to have better-than-average relative price performance (300 stocks).

Rank 3 (Average): These stocks, as a group, are expected to have relative price performance in line with the Value Line universe (approximately 1,000 stocks).

Rank 4 (Below Average): These stocks, as a group, are expected to have below-average relative price performance (300 stocks).

Rank 5 (Lowest): These stocks, as a group, are expected to have the poorest relative price performance (100 stocks).

Changes in the Performance Ranks can be caused by:

  1. New earnings reports
  2. Changes in the price movement of one stock relative to the approximately 1,750 other stocks in the publication
  3. Shifts in the relative positions of other stocks

The record of Value Line Performance Ranks

The chart below shows a record of Value Line Performance Ranks allowing for changes in rank each week (1995-December 31, 2013). We rank stocks in The Value Line Investment Survey® - Small & Mid-Cap using Performance Ranks. The Performance Ranks are similar to the Timeliness Ranks. They are particularly suited to handle short price histories, which characterize many of the companies in the Small & Mid-Cap Survey. A pattern approach is used to determine the probabilities of a stock outperforming the market over the next six months. These probabilities are combined with Technical Ranks to produce the Performance Ranks. The chart below is constructed by compounding average weekly changes (arithmetically computed) of the Performance Ranks since their inception in March 1995.

Record-of-ValueLine-Ranks-for-Performance-chart-2013Dec Record-of-ValueLine-Ranks-for-Performance-data-2013Dec

Safety Rank

A second investment criterion is the Safety Rank assigned by Value Line to each of the approximately 1,750 stocks. The Value Line Safety Rank measures the total risk of a stock relative to the approximately 1,750 other stocks. It is derived from a stock's Price Stability score and from the Financial Strength rating of a company, both shown in the upper left-hand corner of each page in Value Line Ratings & Reports. Safety Ranks are also given on a scale from 1 (Highest) to 5 (Lowest) as follows:

Rank 1 (Highest): These stocks, as a group, are the safest, most stable, and least risky investments relative to the Value Line universe.

Rank 2 (Above Average): These stocks, as a group, are safer and less risky than most.

Rank 3 (Average): These stocks, as a group, are of average risk and safety.

Rank 4 (Below Average): These stocks, as a group, are riskier and less safe than most.

Rank 5 (Lowest): These stocks, as a group, are the riskiest and least safe.

Stocks with high Safety Ranks are often associated with large, financially sound companies; these same companies also often have somewhat less than average growth prospects because their primary markets tend to be growing slowly or not at all. Stocks with low Safety Ranks are often associated with companies which are smaller and/or have weaker-than-average finances; on the other hand, these smaller companies sometimes have above-average growth prospects because they start with a lower revenue and earnings base.

The Penalty and Reward of Risk

A risky stock is one which has low Price Stability and where the price fluctuates widely around its own long-term trend. It may also be a stock of a company with a low Financial Strength rating. One may reasonably assume that the price of a risky stock will go up more than that of a safe stock in a generally strong market. Yet, if in the interim it went down more sharply and you had to sell at an inopportune time, you could suffer a heavier penalty for having bought the high-risk stock instead of the safer one.

High Value Line Performance Ranks give some protection against a general market decline, but only over a period of six to 12 months. They cannot be relied upon to help protect against a sharp drop in the stock market in every week or month, as a high Safety rank may do.

Technical Rank

The Value Line Technical Rank uses a proprietary formula to predict short-term (three to six month) future price returns relative to the Value Line universe. It is the result of an analysis which relates price trends of different durations for a stock during the past year to the relative price changes of the same stock over the succeeding three to six months. The Technical Rank is best used as a secondary investment criterion. We do not recommend that it replace the Performance Rank. As with the other ranks, the Technical Rank goes from 1 (Highest) to 5 (Lowest.)

Funds

Value Line Mutual Fund Ranking System Performance

We often review how well The Value Line® Fund Advisor Ranking System has done. The period of time covered in the current review is from the Ranking System’s inception in 1993 to December 2013. The ranks have a record of which we are proud.

The Value Line Fund Advisor's ranking methodology was first devised in 1993, and has proven to be highly effective. We believe the reason for this success is that it measures growth in terms of consistency rather than magnitude. Because our approach also takes into account performance over three- and five-year intervals, it helps investors to avoid funds with unsustainable stellar performance over short periods of time.

Value Line's Ranking System assigns each fund an Overall Rank. The Overall Rank is calculated on the basis of relative price growth in fund returns, as well as three-year risk-adjusted performance. Price Growth Persistence is a proprietary Value Line measure that rewards a fund for the consistency with which it outperforms the broader universe of equity offerings over an extended period of time. The risk-adjusted performance is calculated by dividing a fund's three-year total return by the standard deviation of its return (a measure of volatility). This is commonly known as the Sharpe ratio.

These factors are then combined into a total score. All funds are lined up from best to worst and are then ranked on a scale of one (Highest) to five (Lowest). Overall and Risk Ranks are distributed across the Value Line mutual fund universe as follows:

Rank % of Funds
1 - Highest / Safest 10
2 - Above Average / Lower Risk 20
3 - Average / Average Risk 40
4 - Below Average / Higher Risk 20
5 - Lowest / Highest Risk 10

We believe this rank is important because it condenses vital performance and risk statistics into a single measure, thus enabling investors to quickly make informed comparisons across a broad universe of funds.

Value Line recommends that investors favor funds ranked in groups 1 and 2 and consider switching from less favorably ranked funds. We also caution that, in order for the Value Line Ranking System to be effective, investors must own a diversified portfolio of top-ranked funds, as any one fund may underperform the 1's and 2's as a whole in any given period. If it’s utilized properly, we believe the Value Line Mutual Fund Ranking System can provide a solid foundation to help enable investors to make sensible investment decisions by narrowing the field of mutual funds to consider.

Moreover, we recommend that investors use the Ranking System in conjunction with The Value Line Model Portfolios, which are provided in the "How To" guide that came with your subscription. There is a questionnaire that will assist you in selecting one of the nine portfolios we recommend. You should, however, make adjustments to the portfolio you select so that it fits your individual needs.

Utilizing both tools should insure that you have a sufficiently diversified portfolio. However, funds ranked 1 or 2 will not always be available in every asset class recommended by the model. In such situations, we recommend that investors select from the highest-ranked funds available.

As you can see in the charts presented here, the numbers clearly show that the Group 1 funds outperformed those in all other groups. In fact, the performance of each of the five groups lines up as expected: the 1's beat 2's, 2's beat the 3's, 3's beat the 4's, and 4's beat the 5's.

All-Equity-Funds-Growth-of-$10000-2013Dec

The results presented assume equal weightings for all funds and also that changes are made once a month for the monthly rebalancing portfolios, and once every six months for the portfolios rebalanced every six months. In the case of the monthly rebalanced portfolios, the portfolio is updated at the time that rank changes are announced. Moreover, we break out no-load fund performance in a separate chart, as we believe most individual investors would be better served by investing in no-load funds.

Options

How We Rank Options

We base our option ranks for each strategy on a weighted combination of the Value Line common stock ranks and our proprietary option model’s calculation of whether the options are underpriced (good for buying) or overpriced (good for writing). Below is a brief summary of our basic option ranks.

Call and Put Buying Ranks: We rank call and put asking (offer) prices from 1 to 3 for buying, with 1 being a “buy”, 2 being a “hold” and 3 being a “close” (i.e. sell back the purchased option). A typical rank 1 call is a call with an underpriced asking price, and an underlying common stock rank of 1. A typical rank 1 put is an underpriced put (again asking price) with an underlying common stock rank of 5.

Covered Call Ranks: We rank covered calls based on a combination of the common stock rank and the degree that the call’s bid price is overvalued. A typical rank 1 covered call is a stock with a common stock rank of 1 and an overpriced call. A rank of 1 means that you should “establish the covered call” (i.e. buy the stock and write the call). A rank of 2 is a “hold” recommendation. A covered call rank of 3 (or 4 or 5) means that you should close your covered call (i.e. sell the stock and buy back the call).

“Naked” (Uncovered) Call and Put Option Writing Ranks: We rank call and put bid prices from 5 to 3 for uncovered (“naked”) writing, with 5 being a “write” recommendation, 4 a “hold” and 3 a “close” recommendation (i.e. buy back the written option). A typical rank 5 call for “naked” call writing is a call with an overpriced bid price that is based on a rank 5 stock. A typical rank 5 put is a put with an overpriced bid price with an underlying common stock rank of 1.

Married Put Ranks: These are stocks that are hedged with puts. We rank married puts based on the common rank of the stock and the degree that the put’s ask price is underpriced. A typical rank 1 married put is a combination of a rank 1 stock hedged with an underpriced put.

Performance-of-ValueLine-Daily-Options-Survey

Calculating Weekly Rank Performance

We calculate our rank performance by comparing prices for the different option ranks on a weekly basis. All our weekly performance calculations are based on the weekly change in the mid-point premiums and do not reflect the effects of bid/ask spreads.

For call and put buying, the base (denominator) for each week’s percentage change is the (mid-point) starting premium. Weekly performance for a particular rank is the average of the percentage gains and losses in these mid-point premiums.

For covered call writing, the base is the beginning stock price minus the premiums (midpoint between bid and ask). For each covered call, the weekly performance is the percent change in stock minus these premiums. We then calculate the average of these percentages.

For "naked" (uncovered) writing, the denominator is the Exchange Minimum uncovered option requirement (i.e. between 10% and 20% of the underlying). For each option, the weekly gain and loss is the starting week premium minus the current premium, divided by the starting margin requirement. Again these percentage gains and losses are averaged to arrive at an average for the week.

For Married Put Buying, the base is the stock price plus the mid-point premium. For each married put, the weekly performance is the percent change in stock plus the premium.

Final Note: It always helps to remember that past performance is no guarantee of future profits. We should also point out that all these performance numbers assume a degree of diversification and rebalancing that is not practical for most investors. Nevertheless, our track record does indicate how powerful a tool intelligent option investing can be.

Convertibles

The Value Line Convertibles Survey Performance Ranking System

Value Line’s Convertible Ranking System combines the evaluations developed by our model with the performance prospects for the underlying stock. Using statistical price distributions patterns, which describe how stocks of various ranks and volatilities have performed in the past relative to the market, the Convertible Ranking System projects the probable price of the underlying stock into the future. The leverage projections developed in the evaluation of the convertible, in turn, provide a projected price for the convertible. To rank an issue, we compare its projected total return, from appreciation and income, to its risk. To be ranked 1 (Highest), an issue of average risk must offer as much total return as the average 1-ranked stock. A convertible would also be ranked 1, however, if it offered a lower total return and its risk was proportionately lower. Conversely, if its risk was greater than average, the total return it offered would have to be higher. Thus, the number of issues of any given rank at any time depends on the attractiveness of each individual issue at that time.

Value Line Convertibles Survey Performance Ranking System ranks convertibles in five groups, 1 (Highest) through 5 (Lowest). As of June 28, 2013, each rank group had returns in following order:

Convertible-Rank-Performance-2012

Not all convertibles in our survey are ranked. There are two main reasons for that. If the underlying common stock is not covered and ranked by either The Value Line Investment Survey or The Value Line Investment Survey - Small & MidCap, then the convertible cannot be ranked. And, if for any business reason the rank of the underlying common stock is suspended, the rank of the convertible is also suspended until the common rank is reinstated. Over the past 35 years, our Especially Recommended Convertibles (annualized) was up 17.1% as of June 28, 2013.

The Value Line Ranking System for has been operating essentially in its present form since 1965. Its exemplary record has attracted the attention of academicians and has been the subject of numerous articles in scientific and financial journals.