Value Line’s Convertible Indexes and Market Prolfiles
These days there are a veritable plethora of published financial market indexes. Some are broad-based, while others are devoted to a particular instrument, exchange or degree of market capitalization. Many of the major stock indexes, such as the S&P 500, are “capitalization weighted” by the dollar value of each stock’s outstanding shares. The equity indexes generated by Value Line are, by way of contrast, un-weighted, with all companies counting equally in the averages.
Starting in March 1982, we began publishing the Value Line Convertibles Indexes. These indexes are designed to evaluate the performance of the U.S. convertible and warrant markets. These indexes measure:
1. Price appreciation/depreciation of all convertibles;
2. Total return appreciation/depreciation of all convertibles;
3. Price appreciation/depreciation of all ranked 1 convertibles;
4. Total return appreciation/depreciation of all ranked 1 convertibles; and
5. Price appreciation/depreciation of all warrants followed by the Value Line Convertibles Survey.
These indexes are based on all convertible bonds and preferred stocks and warrants listed in our Service. (As of July 13, 2010, we covered 564 convertible bonds, 63 convertible preferreds with total market values of almost $210 billion and $33 billion, respectively. The 79 warrants we follow had a market value of about $942 million.)
Like the Value Line Composite stock indexes, our convertible indexes are not capitalization weighted. Instead, they give equal weight to each issue. Often this type of equal weighting is a better indication of how a typical investor’s portfolio is likely to perform, if one assumes holdings of approximately equal allocations to each security. If we were to “cap-weight” our own convertible indexes, then a relatively small sample of the issues would make up most of the index. To augment the analysis in these indexes, we also compute and publish the periodic price performance of the stocks underlying both convertibles and warrants.
So as not to represent extreme price movements in any one security, we use a method of calculation known as “geometric averaging,” which tends to have a “smoothing-out” effect on extreme up and down values in individual securities. But it can also understate performance vis-à-vis some other indexes in a rising market.
Twice a month we publish the most recent numbers for the Convertible Indexes on the back page of The Value Line Convertibles Survey. This PDF document, which is available only to paid subscribers, can be accessed by logging on to the Value Line website (www.valueline.com). Place your cursor on the Convertibles tab, then click on Premium Content from the drop-down menu. On the page that appears, click on the Survey Issues tab, then click on the link to The Value Line Convertibles Survey. We also calculate a month-end index that measures the Price and Total Return performance of all convertibles and warrants in our service. These indexes are published on the front page of The Value Line Convertibles Survey once a month.
Our Convertible Market Profile provides important additional information about the convertibles market. The data can provide some insight about how the convertibles market is likely to perform given a move in the stock market. The profile charts below show the averages (and in some cases, the median values) from the convertibles data listed in our Service. Convertible bonds and convertible preferreds are differentiated with total market values for each. In addition to price and yield data, we also show the median conversion and investment premiums, as well as the average leverage numbers for a 25% up and a 25% down move in the underlying stock. The Value Line Convertible Index chart shows the average changes in price and total return indexes, as well as the average current yield, and the number of positions and advancing issues.