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Earnings Predictability, Price Growth Persistence and Stock Price Stability
The last bit of data that a reader will encounter when making his or her way down the Value Line page are our proprietary scores for Stock Price Stability, Price Growth Persistence, and Earnings Predictability. These can be found at the bottom, right corner of the page, just below a company’s Financial Strength rating. A quick review of these numbers can be a useful step for an investor looking to determine the suitability of a particular stock for his or her portfolio.
On each of these measures, a score can range (in increments of 5) from a low of 5 to a high of 100. The marks are based on how a company (or its stock) stacks up relative to the others in the Value Line universe, with each grouping between 5 and 100 including roughly an equal number of stocks. (At any given time, some of the 1,700 companies we follow won’t receive marks, typically because a stock hasn’t been trading long enough to provide sufficient data for a meaningful comparison.)
Stock Price Stability is based on a relative ranking of the standard deviation (a measure of volatility) of weekly percent changes in the price of company’s own stock over the last five years. Stocks with ranks of 100 represent the most stable, while those with a mark of 5 are the least stable. Notably, Price Stability is one of the two factors—the other being a company’s Financial Strength rating—that determine a stock’s Safety rank.
More conservative investors would obviously want to focus on equities that score near the top of the scale for Price Stability. Stocks of companies that operate in relatively noncyclical sectors of the economy and have predictable revenue streams tend do well on this measure. (This relationship can be short circuited when a company is highly leveraged and interest costs absorb most operating profits, leaving comparatively little for equity investors.) High scores then tend to be fairly concentrated by industry. Electric utilities, for instance, account for roughly one-quarter of stocks with Price Stability scores of 95 or 100. Natural gas utilities, medical supply companies, drug makers, and food processors are also well represented at the upper reaches of the scale.
Next up is Price Growth Persistence. This is a measurement of the historical tendency of a stock to show persistent growth over the past 10 years compared to the average stock. The 10-year time frame on which the current figures are based was obviously a very tumultuous time, incorporating two recessions and two related, and rather severe, bear markets. In fact, several of the leading broader market benchmarks currently trade below where they stood a decade ago. Taking a look at the stocks with top Growth Persistence scores of 100, we can see that Apple (APPL) and United Technologies (UTX - Free United Technologies Stock Report) were among the companies that were able to provide big returns for their shareholders during this tough stretch. Investors in General Electric (GE - Free General Electric Stock Report) and Pfizer (PFE - Free Pfizer Stock Report) were less fortunate. Each of these stocks gets a grade of 5.
Interestingly, stocks with high marks for Growth Persistence currently aren’t, on the whole, that much more expensive than the typical equity. The recent median price-to-earnings ratio for stocks that garner a 100 for Growth Persistence was roughly 17.0, only modestly higher than that of the broader market (16.0).
Finally, we come to Earnings Predictability, which provides a measure of the reliability of an earnings forecast. Predictability is based upon the stability of year-to-year comparisons, with recent years being weighted more heavily than earlier ones. The most reliable forecasts tend to be those with the highest rating (100); the least reliable will usually get the lowest (5). The earnings stability is derived from the standard deviation of percentage changes in quarterly earnings over an eight-year period. Special adjustments are made for comparisons around zero and from plus to minus.
Companies that report earnings that are far out of line with investors’ expectations (be it for the better or for the worse) are typically subject to sharp price movements when this news hits the market. Not surprisingly, then, there is a strong correlation between Earnings Predictability and Stock Price Stability.
Incidentally, we didn’t find any stocks with top marks (of 100) on all three scores, but there were a number that came close. Among the select group of equities grading out with at least a 95 for Price Stability, Growth Persistence, and Earnings Predictability were the aforementioned industrial conglomerate United Technologies, medical-device provider Becton, Dickinson (BDX), and Church & Dwight (CHD), a maker of a wide range of household products, including baking soda, laundry detergent, and toothpaste.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.