Welcome: FAQs
The Value Line Investment Survey
TIMELINESS RANKS | TECHNICAL RANK | OPERATING MARGIN | PRICE/EARNINGS RATIO | ASSET ALLOCATION | ABBREVIATIONS | SELECTION & OPINION PORTFOLIOS | FINANCIAL STRENGTH | A STOCK'S 3- TO 5-YEAR PRICE PROJECTIONS | STOCK DECLINES | SPEAKING TO ANALYSTS | PRETAX INCOME | ERRORS IN REPORTS | COMPANY COVERAGE | GROWTH RATES1) How do you determine the Timeliness rank, and what makes it change?
Value Line's Timeliness Ranking System ranks all of the approximately 1,700 stocks in our universe for relative price performance in the coming six to 12 months. At any one time, 100 stocks are ranked 1; 300 are ranked 2; approximately 900 are ranked 3; 300 are ranked 4; and 100 are ranked 5. In simple terms, Timeliness ranks [which go from 1 Highest) to 5 (Lowest)] are determined by a company's earnings growth and its stock's price performance over a 10 year period. A rank may change under three circumstances. The first is the release of a company's earnings report. A company that reports earnings that are good relative to those of other companies is likely to have its stock move up in rank, while a company reporting poor earnings could see its stock's rank drop.
A change in the price of a stock can also cause a stock's rank to change. A change in price carries less weight than a change in earnings, but it is still an important determinant. Generally speaking, strong relative price performance is a plus, while negative relative price performance is a minus (relative to all other approximately 1,700 stocks).
And finally, there is the "Dynamism of the Ranking System." This phrase means that a stock's rank can change even if a company's earnings and stock price remain the same. That's because a fixed number of stocks is always ranked 1, 2, etc. Every time one stock's Timeliness rank moves up or down, another's must also change. As an example, let's suppose one company reports unusually good earnings, causing its stock's Timeliness rank to rise from 2 to 1. Since there can be only 100 stocks ranked 1, some other stock must fall to a rank of 2, even though there has been no change in its earnings or price.
2) The Timeliness ranks in your pdf-formatted reports on companies are often different than those in the Value Line Stock Screener. I find this confusing. Can you tell me why they are not the same?
Yes. It is a question of timing. Our full-page company reports are updated once every three months on a regular cycle. The Timeliness ranks that appear in those reports are the ones that were current when the report was printed. (You can find a date in the lower right corner at the end of the analytical text.)
The Stock Screener (and the Summary & Index), on the other hand, is updated every week and includes the very latest ranks. If there has been a change in rank since the full report was revised, the new rank will be included in the Screener, and it will be different than the one in the company report.
To find the most recent Timeliness (or Safety or Technical) rank, be sure to look at the lastest information. You can always find it in the Stock Screener or in the Summary & Index.
3) Can you tell me where a particular stock ranks within its class (a high 1, a low 1, etc.)?
We do not disclose this information. However, we do list the date when a rank last changed and what the direction of the change was. Next to the Timeliness rank on each company page you can see when the last change occurred and whether it was raised or lowered. Changes are also indicated each week in the Summary & Index by an arrow next to Timeliness ranks.
4) I think that Value Line should change a certain stock's rank. Will you do it?
We appreciate your interest, but all ranks are generated by computer driven instructions and historical data. Value Line methodology keeps our System objective and unbiased, because the same criteria apply to all stocks.
5) Would you tell me the formula you use to calculate ranks?
The details of the formula are proprietary. The components of the Timeliness Ranking System include the long-term trend of earnings and stock prices, recent company earnings and stock price performance, and a comparison of the latest quarterly earnings with those that had been expected. (Better than expected earnings are normally positive, less than expected earnings, negative.) We cannot be more specific than that.
6) Why do stocks with Timeliness ranks of 1 or 2 sometimes have below-average, long-term appreciation potential, and vice versa?
Probably the most important thing for all readers to know is that the time horizons for Timeliness ranks and for 3- to 5-year Projections are very different. Our Timeliness ranks are for the relative performance of stocks over the coming six to 12 months. Our forecast for long-term price potential is for 3 to 5 years. Because of the very different time periods, our forecasts for the two periods can be very different.
But to provide a more specific answer, stocks ranked 1 or 2 for Timeliness often have been moving higher, and while we think these stocks will continue to outperform other stocks in the Value Line universe, it is unrealistic to think a stock's price will keep moving up forever. At some point, earnings growth is likely to slow, at least somewhat, and our analysts try to be as realistic as possible in calculating the 3- to 5-year projections. If earnings growth slows in the future, the stock price and the price/earnings ratio are likely to move down, and the analyst is probably forecasting such a change.
7) Why do some stocks not have a Timeliness rank?
Our computer-generated Timeliness ranks require at least two years of income statement and stock price history. If a stock has been trading for less than two years, possibly because a company is relatively new or because there was a major spinoff or acquisition, we are unable to assign a rank to it.
8) What exactly is the Technical rank?
The Technical rank uses a stock's price performance over the past year to predict short-term (three to six month) future returns and ranks each stock in our 1,700-company universe against each other. There are no other factors incorporated into the model. While our Technical rank does contribute to investment decisions, we would like to stress that our primary investment advice is based on our successful time-proven Timeliness Ranking System. The Technical rank is best used as a secondary investment criterion.
9) Why does Value Line sometimes show different share earnings than the company, Standard & Poor's, The Wall Street Journal, or my broker?
We each calculate earnings differently. In particular, Value Line excludes what we consider to be unusual or one-time gains or charges in order to show what we consider to be "normal" earnings. Company earnings often contain one-time non-recurring or unusual items, such as expenses related to the early retirement of debt, a change in accounting principles, restructuring charges, or a one-time gain or loss on the sale of assets. In order to make a reasonable comparison of core operating results from one year to the next-or from one company to another-it is necessary to exclude these items from reported earnings. Some items are relatively easy to take out because they are explicitly shown in the company's income statement and footnotes. Others, however, must be estimated by our analysts. Any unusual adjustments to reported earnings will be disclosed in the footnotes of each Value Line report.
10) I have noticed that the companies are now referring to share earnings as basic or diluted, instead of primary or fully diluted. Can you explain the differences to me? And, will Value Line be using these new terms?
In 1997, the Financial Accounting Standards Board decided that companies should report earnings as basic and diluted, not as primary or fully diluted as had been the case.
Basic earnings per share are earnings based on the weighted average shares outstanding in each quarter. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stocks (including options and warrants) were exercised or converted into common stock. Value Line is now reporting the new basic or diluted earnings numbers. We normally report only one share earnings figure in the financial tables in The Value Line Investment Survey, and, as in the past, we will use our judgment in determining which is most appropriate. The diluted number is the one we will use in the great majority of cases because it results in a more conservative (generally lower) number. We will indicate whichever number we use in the footnotes at the bottom of each page. Be sure to look there.
11) What is an operating margin?
The operating margin shows profits (before deduction of depreciation, amortization, interest, and income taxes) as a percentage of sales or revenues.
12) Why does the Value Line price/earnings ratio often differ from that in The Wall Street Journal or brokerage reports?
All price/earnings ratios are calculated by dividing the recent stock price by 12 months of earnings. The different ratios occur because we each use different 12-months earnings figures. Newspapers use 12-months trailing (i.e., reported) earnings. Value Line uses a total of the past six months of trailing earnings and the next six months of estimated earnings. (In our view, this is the best method since it incorporates both recent history and a near-term forecast.) Your broker is likely to use a calendar year's earnings. Just be sure that when you are comparing two companies' P/E ratios, you are using the same methods.
13) What are the inputs used in the asset allocation model that appears at the end of each week's Value Line View or in the Quarterly Economic Review?
Our proprietary asset allocation recommendation, which normally appears each week on the inside back cover of Selection & Opinion, is derived from a model that uses many macroeconomic and other factors in an attempt to predict the general direction of the market.
14) I have trouble understanding some of your abbreviations. Can you help me?
Yes. Most of the frequently used abbreviations are included in the Glossary posted on this web site.
SELECTION & OPINION PORTFOLIOS
15) How are stocks chosen for the Selected Investments model Portfolios I, II and III in Selection & Opinion?
Portfolio I, Stocks with Above-Average Year-Ahead Price Potential, is built on Value Line's well-respected Timeliness Ranking System. It is primarily suitable for investors who wish to take more risk in hopes of greater returns than might be afforded in Portfolios II or III. To qualify for purchase, stocks have to be ranked 1 (Highest) for Timeliness. To reduce portfolio turnover (and recognizing the fact that many good growth stocks go up and down in price along the way), a stock that drops a rank in Timeliness to 2 (Above Average) may remain in the portfolio, assuming that the company's longer-term fundamentals remain sound. A stock that drops to 3 (Average) for Timeliness must be sold. We attempt to diversify the holdings as much as possible, but note that the Timeliness Ranking System tends to favor high earnings growth and more volatile issues that may cluster in a few industries.
Portfolio II, Stocks for Income and Potential Price Appreciation, attempts to combine our Timeliness Ranking System with an investment objective for above-average income. This portfolio is primarily suitable for more conservative investors. To qualify for purchase, stocks must be ranked at least 3 (Average) for Timeliness. The yield (the estimated annual dividend for the next 12 months divided by the recent stock price) must be higher than the median yield for all approximately 1,700 stocks Value Line follows. The median is shown on the cover of the Summary & Index each week. In a strong bull market, there are few investments that meet these stringent criteria. The higher-than-average yields provide support to the shares in down markets. This portfolio tends to be less volatile because the companies, as a whole, are more likely to be mature and predictable.
Portfolio III, Stocks with Long-Term Price Growth Potential, is based on the fundamental research of our staff of research analysts. This portfolio is suitable for investors with a 3- to 5-year horizon; in terms of risk, it falls somewhere between Portfolios I and II. This portfolio tends to be the most flexible, allowing purchases of a broader array of companies. It is constructed under the principles of modern portfolio theory, which state that the risk of a portfolio should be viewed within the context of a portfolio as a whole, rather than judging the portfolio according to the average rankings of individual securities it holds. To that end, this portfolio is generally well diversified, comprising stocks in a variety of different non-related industries.
Each portfolio is dedicated to a different investment objective. To make the portfolios more attractive and useful to conservative investors, Portfolios II and III must hold stocks that are ranked at least 3 (Average) for Safety.
16) The Selected Investments section of Selection & Opinion has three portfolios. Why isn't there a "Conservative" portfolio?
Portfolio II, Stocks for Income and Potential Price Appreciation, is the one we would recommend for "conservative" investors. A key criterion for this portfolio is that the stocks have above-average yields. These attractive yields lend support to stock prices when the market is declining. This portfolio usually also has slightly lower-than-market risk (volatility) as measured by the average beta of the portfolios.
17) What goes into the Financial Strength rating for each individual company?
Our Financial Strength ratings take into account a lot of the same information used by the major credit rating agencies. Our analysis focuses on net income, cash flow, the amount of debt outstanding, and the outlook for profits. Other factors also enter into the equation. For example, a company that faces the loss of patent protection on a key product might face a downgrade. The ratings range from A++ (Highest) to C (Lowest), in nine steps, based on the judgment of our senior staff members.
A STOCK'S 3- TO 5-YEAR PRICE PROJECTIONS
18) How are a stock's 3- to 5-year share-price projections derived?
Our analysts have developed a comprehensive spread-sheet model that takes into account the current economic climate, the company's operating fundamentals, including recent management initiatives, the actions of the competition, and many other relevant factors for each company. These models are used to develop our earnings and other financial projections for the coming 3 to 5 years. The Target Price Range is then calculated by multiplying the stock's earnings per share for the period out 3 to 5 years (in the far right hand column of the statistical array) by the stock's projected average annual price/ earnings ratio for the same period and then developing a range showing the likely high and low price. The width of the band of the share-price projections varies, depending on the Safety rank of the company. Riskier stocks have a wider band, and vice versa.
19) I bought a stock based on your advice, but it went down. What happened?
As you undoubtedly know, our Timeliness Ranking System has worked extremely well over time. Not all stocks do as we forecast, though, and we have never suggested that they will. What we have strongly recommended is that you diversify your portfolio by purchasing at least six stocks in at least six or more industries. That way, you will protect yourself from unexpected changes in the price of any one stock or any one industry. Also keep in mind that the Value Line Ranking System is relative. In declining markets, group 1 and 2 stocks have historically declined less than the general market. On the other hand, stocks ranked 1 and 2 have outperformed the market during periods when stock prices were rising.
20) I would like to speak to the Analyst who wrote a report.
Unfortunately, this isn't practical. Our staff of analysts has been hired and trained to analyze stocks and write commentaries for The Value Line Investment Survey and, to be fair to all subscribers, they do not have time to provide personalized advice or information.
21) Where can I find pretax income on a Value Line page?
You can't. We do, however, show net profit after taxes (usually line 14 in the Statistical Array) and the effective tax rate (usually line 15). You can calculate pretax income by dividing net profit by: 1 minus the tax rate. Example: If net profit was $100 million and the tax rate was 36%, pretax profit would be $156.25 million.
22) What should I do if I find an error in a report?
If you think you have found an error in any of our publications, we would very much like to hear from you so that we can correct the mistake. Please write or call us. If you call, let the operator know that you want to report an apparent error, and he/she will connect you with an administrative assistant in the Research Department. Please address your written comments to the office of the Research Director.
If you believe you have found an error in an historical price or per share data item, please read on:
We actually receive very few complaints about our data. Most of those that we do get relate to historical prices and per share data, and the fact is that our stock prices, earnings, and other data are usually correct. When there appears to be a difference in stock prices or earnings per share, it is usually because of a stock split or a stock dividend. Value Line (and everyone else) retroactively adjusts historical stock prices and share data for stock splits. Splits and dividends of 10% or more are shown in the Legends box in the upper left hand corner of the price chart. Splits of less than 10% are shown in the footnotes.
23) Does a company pay to be included in The Value Line Investment Survey?
No. Value Line is not compensated by the companies under our review. This allows us to be totally objective when we analyze companies in The Value Line Investment Survey.
24) Does the roster of stocks covered by Value Line change?
Yes. Vacancies constantly occur within our approximately 1,700 stock universe. Sometimes a company's earnings will deteriorate to such a degree that we believe investors have lost interest. If that happens, we will discontinue coverage. More frequently, companies leave our universe when they are acquired by or merged with another firm. Acquired or merged companies will be replaced by others. In choosing replacements, we try to select actively traded stocks with broad investor interest.
25) Why isn't ABC, Inc., a large well known company, included?
We do try to include companies with actively traded stocks, which have broad public interest. If ABC fits in this category, we will, in all likelihood, provide coverage in the future.
26) How are the growth rates calculated in the Annual Rates of change box?
We use a compound annual rate that reflects the annual change for various items over the entire period being computed. All rates of change are computed from the average figure for a past 3-year period to an average for a future 3-year period.
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