Understanding Value Line Research
Value Line Ranking System
To invest with confidence, join other sophisticated investors and begin your stock analysis with Value Line’s ranks. The performance of our Timeliness™ and Safety™ Ranks is unprecedented. No other investment research company’s track record comes close to Value Line’s for identifying stocks that will deliver the highest returns over time.
Timeliness Rank
Results prove that your best strategy for outpacing the market is to buy stocks with high Timeliness Ranks. The Timeliness Rank alerts you to the expected price changes of a stock for the coming 6 to12 months, relative to the roughly 1,700 stocks that Value Line analysts cover.
Timeliness Ranks are assigned grades from 1 to 5. Stocks ranked 1 offer you the highest price growth potential, while you can expect those ranked 5 to have least potential gains.
All data used to calculate the Timeliness Rank are actual, known, and continuously updated.
Some of the factors that determine a stock’s Timeless Rank are:
- Earnings growth. A Company who's earnings growth over the past 10 years is greater than its stock's price appreciation over the same period is likely to have a higher rank.
- Recent quarterly earnings performance.
- Recent earnings surprises that are significantly better or worse than expected. The stock's recent price performance relative to all the other stocks in the Value Line universe.
How can you interpret a specific rank? Here’s what the grades mean:
Rank 1 (Highest): Your highest likelihood for capital gains within the next 6-12 months. We expect the price appreciation for rank 1 stocks to be greater than the other stocks in the Value Line universe over this period.
Rank 2 (Above average): Expect stocks ranked 2 to show better-than-average price appreciation relative to the other stocks we follow.
Rank 3 (Average): These stocks are in the middle. Presume their price performance will be in line with the majority of stocks our analysts follow.
Rank 4 (Below average): These stocks are likely to underperform stocks ranked 1 through 3. You should probably take their anticipated below-average price performance as a red flag.
Rank 5 (Lowest): Unless you’re a long-term speculator, it is wise to avoid rank 5 stocks. We expect their price performance to be the poorest of all stocks in our database.
There are three fundamental reasons a Timeliness Rank can change: as a result of new earnings reports or company forecasts, changes in the price momentum of a stock relative to the other stocks in the Value Line universe, and shifts in the relative positions of other stocks. Value Line calculates changes in the Timeliness Rank every week. This assures that the ranks of your portfolio stocks and the ranks of stocks you are watching are always current.
A word of caution to conservative investors
Stocks ranked 1 for Timeliness are often more volatile than the overall market. They tend to have smaller market capitalizations (the product of a company’s outstanding shares times the stock’s price per share). If you’re a conservative investor, you may want to select stocks with both high Timeliness and Safety Ranks, because stocks with high Safety Ranks are likely to be more stable (details below).
Performance-proven, so you can make buy-sell-hold decisions with confidence.
The price performance over time of stocks ranked 1 is absolutely unmatched in the world of investing.
Making changes weekly
The performance of the Timeliness Rank is outstanding when all rank changes are implemented weekly.
It is unlikely a stock ranked 1 or 2 will outperform the market every week or month. But — over the long term — you can depend on top-ranked stocks to outflank lower-ranked stocks, as actual results demonstrate.
In a general market decline, you can assume that high Timeliness Ranks will protect you to a certain degree, but only over the coming 6 to 12 months. On the other hand, don’t depend on a high Timeliness Rank to insulate your portfolio from a sharp drop in the stock market on any given day, week or month, as a high Safety Rank may do.
Value Line’s Timeliness and Safety Ranks, combined with our incisive Analyst Commentary, are your most valuable tools for making decisions that fit your particular investment strategy.
Safety Rank
The second key to investing with confidence is Value Line’s Safety Rank.
The Safety Rank measures the total risk of a stock relative to the other stocks in the Value Line universe.
The Safety Rank is calculated from the Financial Strength rating of a company and its Stock’s Price Stability score. Financial Strength is a measure of the company’s financial health. Price Stability is based on a ranking of the standard deviation (a measure of volatility) of weekly percent changes in the price of its stock over the last five years.
Like the Timeliness Rank, stocks receive Safety Ranks for the next 6-12 months on a scale from 1 to 5:
Rank 1 (Highest): Your safest, most stable, and least risky stocks relative to all the stocks in the Value Line universe. Rank 1 stocks may have lower Timeliness ranks because of their stability.
Rank 2 (Above average): You can expect stocks ranked 2 to be safer and less risky than average.
Rank 3 (Average): These stocks are in the middle. Assume their risk level is consistent with the majority of stocks we follow.
Rank 4 (Below Average): If you’re tolerant of risk, you might not rule out a stock with a rank 4. Expect rank 4 stocks to be riskier and less stable than higher ranked equities. Conservative investors will want to avoid these stocks.
Rank 5 (Lowest): These stocks are the riskiest and least safe. If you’re an aggressive investor who can tolerate a high level of risk, you may want to consider rank 5 stocks because many represent smaller, less stable, growing companies that may yield rewards commensurate with their risk in the future.
If you expect the market to head lower, but prefer to maintain an equity-based portfolio, concentrate on stocks ranked 1 or 2 for Safety. At the same time, keep your portfolio composed of stocks ranked as high as possible for Timeliness. If you can’t find stocks ranked high on both counts, you’ll have to decide which is more important to you — price performance over the next six to 12 months, or Safety. You may also want to consider a compromise by picking stocks ranked 1 or 2 for Timeliness and 1 or 2 for Safety.
Peer and industry comparisons
When you assess a company’s Timeliness and Safety Ranks, be sure to note how the company compares to its peers and industry group. This gives you a wider perspective on the company and Value Line’s forecasts for it.
For conservative investors
If you’re a conservative or income-oriented investor, pay particular attention to stocks with high Safety Ranks. These stocks are usually associated with large, financially stable companies with strong balance sheets. Companies whose stocks have a high Safety Rank often have less-than-average growth prospects because their primary markets tend to be growing slowly or not at all.
For aggressive investors
Aggressive investors might want to hold stocks with low Safety Ranks. These companies are often smaller and/or have weaker-than-average finances. But they can have above-average growth prospects because they start with a lower revenue and earnings base.
Safety is especially important in periods of stock market downswings, when you will want to limit your losses.
As with Timeliness, you can rely on the Safety Rank with confidence. Its performance is clear: 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 1972 and the present.
| Start Date | End Date | Rank 1 | Rank 2 | Rank 3 | Rank 4 | Rank 5 | S&P 500 | Russell 1000 | Russell 2000 |
|---|---|---|---|---|---|---|---|---|---|
| 4/14/1972 | 9/11/1974 | –40.50% | –39.90% | –47.20% | –53.30% | –70.00% | –37.60% | N/A | N/A |
| 6/17/1981 | 8/11/1982 | –10.50% | –16.20% | –25.20% | –33.60% | –31.40% | –23.00% | –24.20% | –28.20% |
| 8/26/1987 | 12/4/1987 | –24.70% | –28.70% | –36.00% | –40.70% | –46.90% | –33.10% | –32.90% | –38.90% |
| 7/16/1990 | 10/11/1990 | –9.00% | –16.20% | –23.70% | –31.30% | –27.70% | –19.90% | –20.50% | –29.40% |
| 10/7/1997 | 10/27/1997 | –6.90% | –6.30% | –8.70% | –10.00% | –11.60% | –10.80% | –10.30% | –9.40% |
| 7/17/1998 | 8/31/1998 | –11.30% | –14.90% | –23.60% | –31.20% | –32.30% | –19.30% | –19.90% | –26.90% |
| 9/23/1998 | 10/8/1998 | –1.40% | –5.70% | –12.90% | –19.30% | –18.70% | –10.00% | –10.70% | –17.50% |
| 7/16/1999 | 10/15/1999 | –9.40% | –11.60% | –13.70% | –11.50% | –10.60% | –12.10% | –12.20% | –10.90% |
| 3/24/2000 | 4/14/2000 | 3.30% | 1.10% | –4.00% | –18.00% | –16.40% | –11.20% | –12.10% | –21.00% |
| 9/1/2000 | 10/9/2002 | –4.00% | –6.00% | –8.80% | –40.40% | –28.10% | –48.90% | –49.60% | –39.70% |
| 11/27/2002 | 3/11/2003 | –10.40% | –9.60% | –15.10% | –21.30% | –21.60% | –14.70% | –14.30% | –15.40% |
| 10/9/2007 | 3/9/2009 | –46.80% | –54.90% | –54.30% | –63.30% | –62.40% | –56.80% | –56.90% | –59.40% |
| 4/23/2010 | 7/2/2010 | –12.10% | –12.20% | –17.20% | –23.70% | –31.30% | –16.00% | –16.30% | –19.30% |
| 4/29/2011 | 10/3/2011 | –12.90% | –17.20% | –25.80% | –34.70% | –47.70% | –19.40% | –20.30% | –29.60% |
| 5/21/2015 | 8/25/2015 | –9.20% | –8.80% | –14.90% | –20.00% | –23.30% | –12.40% | –12.30% | –12.20% |
| 11/3/2015 | 2/11/2016 | –6.60% | –7.50% | –18.70% | –25.90% | –33.40% | –13.30% | –14.10% | –20.00% |
| 1/26/2018 | 2/8/2018 | –9.10% | –8.30% | –9.40% | –9.60% | –12.90% | –10.20% | –10.10% | –9.00% |
| 9/20/2018 | 12/24/2018 | –13.40% | –15.30% | –23.80% | –28.90% | –39.70% | –19.80% | –20.10% | –26.40% |
| 2/19/2020 | 3/23/2020 | –33.40% | –35.40% | –42.70% | –45.40% | –51.90% | –33.90% | –34.70% | –40.80% |
Penalty and reward of risk
A stock with a low Timeliness Rank is risky. It earns a low rank because it has shown low Price Stability or lackluster earnings growth, and its price fluctuates widely around its own long-term trend. A risky stock may also be one of a company with a low Financial Strength rating. You can be confident that the price of a risky stock will rise more than the stock of a safe stock in a generally strong market. But, a caveat: if the market declined sharply in a short time frame, and you were forced to sell at an inopportune time, you could suffer a heavier penalty for having bought the high-risk stock instead of the safer one.
*Arithmetic averaging allowing for weekly rank changes.
Analyst Commentary
Before you buy, sell, or hold a stock, delve into Value Line’s Analyst Commentary.
Analyst Commentary is where you’ll discover what is really going on with a company and its corresponding stock. Consulting an Analyst Commentary gives you an easy-to-read, expert assessment of a company’s performance, based on a plethora of available data. It also includes:
- An action-oriented forecast of what to expect from revenues and earnings for the coming one to five years.
- A sophisticated opinion about whether or not a stock is attractive on a short-term or longer-term basis.
Value Line analysts utilize a great deal of resources and information to properly evaluate a company and its stock. This typically includes a thorough appraisal of a company’s financial statements, press releases, and stock performance. Our analysts also consider business and trade media content, as well as our own proprietary data and ranks.
Analysts often attend analyst meetings, participate in conference calls, and may visit company headquarters or plants, so you take away a 360° view of the company and its operations.
Our analysts fully review each company four times a year. Between reviews, you can follow important company updates through Research Notes, also found in the Commentary section. Analysts issue these short comments when important events occur that may change their assessment of the company and its stock.
Analyst Commentary and the Research Notes are crucially important because there are times when raw numbers don’t tell the whole story about a company’s performance, or when a new trend is emerging.
For example, a stock might have a low Timeliness™ Rank, but the analyst may uncover evidence that earnings could turn around in the foreseeable future. In the Commentary, the analyst will explain why conditions are likely to improve, thereby giving you reason to continue to monitor the equity.
On the other hand, Analyst Commentary might alert you to potential earnings surprises, management changes or other factors that could make a stock less desirable than its recent history might indicate.
To have full confidence in your investing decisions, always read the Analyst Commentary and Research Notes for every stock you are holding or considering.
Valuation
Dive into Value Line’s Valuation estimates and historical data for the power to make intelligent buy-sell-hold decisions that can have a strong impact on your financial future.
The Valuation module puts data on 23 crucial measures of company performance at your fingertips. To invest wisely, refer to Value Line’s historical data, analyst estimates for the current and coming year, and 3-year projections before you make a move.
Calculated from our continually updated database for every company Value Line tracks, these measures include estimates of future:
- Sales, earnings and dividends per share
- Annual price/earnings ratios and dividend yields
- Total sales, net profit margins, long-term debt and shareholders’ equity
Valuation estimates
Valuation estimates are where our unbiased analysts reveal their current assessment of a company’s future. Their forecasts are based on the company’s most recent results, anticipated growth from new products, planned capital expenditures, overall financial health, current and expected competitive scenarios, and Value Line's general economic forecasts.
Be alert to unusual but important developments in our forecasts that aren’t revealed in the standard statistics. For example, we might factor in the expected outcomes of pending lawsuits and the anticipated successes of new products.
Valuation estimates, together with 3- to 5- Year Projections, can help you anticipate future scenarios. Use them as guidelines to what our independent analysts think the future will bring.
Historical valuation data
Historical valuation data is one of the backbones of our analysts’ calculations, and it should be yours too.
In the Valuation module, this data can extend back 10 years. As a smart investor, you’ll analyze these statistics to confidently identify ongoing trends in a company’s results, and to assess its stock’s appropriateness for your investing strategy.
When evaluating historical valuation data, be on the lookout for trends. Recognizing trends is crucial, because they show whether there is a consistent pattern of growth, decline, or flat performance across a number of different measures. Historical data also reveals whether a company’s numbers have been erratic, which should be one of your major considerations when making any investment decision.
For example, look at sales per share to see if they have been rising for an extended period of time. Dive into operating margins and net profit margins to determine if they are expanding, narrowing or staying flat. Also explore the Return on Total Capital or the Return on Shareholders’ Equity percentages to discover if they have been rising, falling or remaining about the same.
Through historical valuation data, you have the flexibility to customize your research and craft your portfolio with confidence.
Annual rates of change
Analyzing annual rates of change can crystalize your decision making. It can point you to growing companies that are expected to continue growing, and alert you to those that aren’t.
Annual rates of change are two-part indicators. First, they give you an unbiased assessment of a company’s recent performance, as indicated by five key performance statistics for the past 5 and 10 years. These measures, on a per-share basis, are usually:
- Sales
- Cash Flow
- Earnings
- Dividends
- Book Value
Second, you can use annual rates of change to project a company’s potential growth rate for each measure, going forward 3-to-5 years.
To eliminate short-term fluctuations that may distort results, Value Line analysts use a three-year base period and a three-year ending period when calculating growth rates.
Annual rates of change are usually positive but can also be negative. A negative annual rate of change signals that a company’s best days may be in the rearview mirror.
Trends are important here. To help make smart buy-sell-hold decisions, check whether growth has been increasing or slowing. In addition, examine the analyst’s projected 3-to-5-year growth rates to anticipate whether growth is expected to quicken or slow. To complete your analysis, be sure to delve into the Analyst Commentary for an expert opinion about the stock’s future growth prospects.
Security Banner
Quickly get down to business with the security banners at the top of each Company View page. Security banners are your quickest and easiest way to view the most important measures of an equity’s performance before you dig deeply into the full range of information accessible on each Company View page.
The first banner you see gives you an instant snapshot of a stock’s key measures like Value Line’s Timeliness™ and Safety™ Ranks, Financial Strength rating, and analyst projections. The banner also gives you a quick view of target price range, dividend yield, price/ earnings ratio, and beta.
At the far right of the Security Banner is a three-bar icon. Click on the bars for two additional Security Banners.
The second-level banner focuses your attention on Value Line estimates and projections for the company you are researching.
And the third level spotlights dividend and volatility information. Volatility consists of beta and alpha. Value Line calculates beta through a proprietary formula that measures a stock’s sensitivity to the market’s overall performance. Alpha is a measure of performance on a risk-adjusted basis. (See below.)
Projected Target Price Range
When your strategy is long-term growth, your goal is to buy stocks with potentially above-average price appreciation. Our analyst-derived three- to five-year Target Price Range is one of your most important tools for identifying these stocks.
Target Price Range is a forecast of where Value Line expects the average price of a stock to be in the next 3-to-5 years. The range is based on our analyst’s informed estimate of company earnings during this time frame, multiplied by the analyst’s estimated price/earnings ratio for the same period.
The difference between a stock’s potential high and low prices depends on the stock’s Safety™ Rank. Expect a stock with a high Safety Rank to be more stable, and therefore to have a narrower band. A stock with a low Safety Rank is likely to be more erratic, and therefore have a wider range.
Because the analyst calculates the Target Price Range using an estimate of future earnings, based on information available at the time it is calculated, this measure is very subjective. As company performance changes in the future, the Target Price Range will also be altered.
Price/earnings ratio
The price/earnings ratio (P/E Ratio or P/E) is the most widely used statistic in investing.
If you’re like most accomplished investors, you won’t make a move without knowing the P/E ratios of the companies whose stocks are on your short list. And you’ll regularly check the P/E ratios of the companies whose shares you own.
The P/E ratio is a measure of a company’s market value relative to its earnings. In the most basic terms, a P/E ratio is the price of a company’s stock at the close of the previous trading day, divided by its share earnings. Value Line calculates the P/E by dividing a stock’s current price by an earnings figure that includes six months of past earnings and six months of projected future earnings.
Let’s say a company’s share price is $40.00 and its earnings per share is $2.00. Its P/E ratio would be 20 ($40.00 divided by $2.00). If the company’s earnings jump to $2.50 and its price remains $40.00, then its P/E would lower to 16, a more attractive scenario in this case.
There is no "right" or "wrong" P/E. Expect to pay a higher price, and accept a higher P/E, for companies whose earnings are accelerating. The opposite is true for companies whose earnings are flat or growing slowly.
If you believe that earnings are poised to take off before the market recognizes it – and the company is maintaining its current P/E ratio – you might want to buy now in anticipation of a future earnings jump.
In fact, depending on your tolerance for risk, you might be willing to pay a relatively high price for a stock with low, or even no earnings, in anticipation that it will be a standout money maker in the future.
On the other hand, if our analyst projects continuing growth for a company, but its P/E is already high, you may want to wait for a pullback in price before committing funds so you don’t pay more than you want, based on the total return you anticipate.
You’ll also find a trailing P/E and a 10-year median P/E in our data.
The trailing P/E does not consider future earnings. It divides the stock’s previous trading day’s closing price by the most recent 12 months of actual earnings.
Dividend yield
A dividend is a payment by a company to its shareholders. It is usually in cash, and usually paid quarterly.
Dividend yield measures a company’s expected return from dividends in the coming 12 months, expressed as a percent of its recent price.
Above-average dividend yields are especially important for conservative investors who are seeking income. A company’s attractive yield tends to support its stock when the market is declining. Plus, an above-average yield usually results in slightly lower-than-market risk (volatility) compared to the average stock in our coverage universe.
If you are primarily an income-oriented investor who is less concerned about a stock’s price appreciation potential than the reliability of its dividends, screen for stocks with higher-than-average yields. Then see if the dividend payment is trending higher over time. Steady increases are an attractive measure of potential future performance. Finally, check out the company’s Financial Strength rating. Financial Strength tells you whether the company will likely be able to continue to pay its dividend, and how likely the dividend will continue to increase. We suggest that conservative investors only consider buying shares in companies with Financial Strength ratings of at least B+
Beta
Beta is a relative measure of volatility -- the historical sensitivity of a stock’s price to fluctuations in the NYSE Composite Index over the past five years.
Your evaluation of a stock is not complete without considering beta. Value Line’s beta is based on a proprietary formula that uses regression analysis to determine the relationship between weekly percentage changes in the stock price, and weekly percentage changes in the NYSE Composite Index, over the past five years. In the case of shorter price histories, a shorter time period is used, but two years is the minimum.
The market beta is set at 1.00. If a stock’s beta is also 1.00, it has historically moved in lock step with the general market. For example, if the market rises or falls by 10%, a stock with a beta of 1.00 will probably increase or decrease by about 10%.
A beta above 1.00 indicates that a stock is more volatile than the market as a whole. For example, if a stock has a beta of 1.50, it has historically been 50% more volatile than the market. As a result, if the market increases or decreases by 10%, the stock will probably increase or decrease by about 15%.
The reverse is also true. If your stock has a beta of .70, it is less volatile than the overall market. In this case, if the market rose or declined by 10%, your stock will likely rise or fall by 7%.
It is important to note that betas vary across companies and industries, depending on various factors, including general economic performance, the cyclical nature of industries, and other factors. Utilities, for example, are usually low-beta companies.
If you are a conservative investor, you will likely favor stocks with low betas to limit volatility. Remember, however, that beta is a double-edged sword. Stocks with low betas won’t fall as much as the broader market in a market decline, but when the market rallies, they will likely be relative underperformers.
3- to-5- year projections
When your primary goal is long-term price appreciation, dig into Value Line’s authoritative 3-to-5-year projections to spotlight stocks with above-average appreciation potential.
Projections cover estimated sales, earnings, cash flow, book value, and other central measures of company financial performance for the coming 3-to-5 years.
To arrive at projections you can rely on with confidence, a Value Line analyst conducts a thorough review of a company’s most recent results, the growth expected for its products, its planned capital expenditures, its overall financial condition, and its current and expected competitive situation. The analyst also factors in Value Line’s economic forecast for the company.
The results paint a compelling picture of a stock’s potential high and low average prices, the projected percentage of its price appreciation or depreciation, and anticipated compound annual total returns (price appreciation plus dividends).
Use our 3-to-5-year projections as a compass to guide you to stocks that meet your financial goals.
The 3-to-5-year projection is based on an analyst’s educated estimates. You should consider it as a subjective, but unbiased, measure.
Financial strength
For a robust picture of stocks you’re following, or those you’re thinking of buying, center your attention on Value Line’s Financial Strength rating.
The Financial Strength rating is an analysis of a company’s balance sheet that reveals the company’s financial condition. A strong balance sheet typically suggests that the company’s stock price will be less volatile than the average equity in our coverage universe,, that it will be able to continue paying its dividend, and it has adequate financing to expand without paying hefty interest to banks or bondholders.
The rating weighs numerous income statement and balance sheet factors similar to those the major credit rating agencies use: net income, cash flow, outstanding debt, leverage, business risk, level and direction of profits, earned returns, cash, corporate size, stock price, cash on hand, net of debt, and the outlook for profits.
Our expert analysts assign companies Financial Strength ratings from A++ to C, in nine steps. Analysts review each company’s rating quarterly, and require significant performance changes to alter its rating.
As a rule, the largest companies with the strongest balance sheets and the deepest pockets earn the highest grades. Companies with serious financial difficulties receive the lowest. Occasionally, other factors enter the equation. For example, a company might incur a downgrade if it faces the loss of patent protection on a key product.
If you’re a conservative or income-oriented investor, you may be most comfortable investing only in companies with Financial Strength ratings B+ or better.
Other considerations
When times are good, investors tend to let a company’s financial situation slip into the background. Cash flow is healthy and bank loans are available. If necessary, the company can raise funds for expansion through stock and debt offerings. A company’s financial strength is especially important, however, when the economy is contracting. During a recession, cash flow falls, banks aren’t eager to lend, and pricing conditions are tougher when trying to sell shares or corporate debt.
Muddying the waters is the fact that not all industries are structured the same way financially. The utilities and financial sectors are prominent examples in that regard. Electric, natural gas, and water utilities are much more highly leveraged than industrial companies, with debt often topping 50% of total capitalization. Utilities are required to use more debt, because it is cheaper than equity. The increased financial risk is offset by reduced business risk, since utilities are very stable businesses. Relatively more equity and better fixed-charge coverage ratios support utilities’ financial strength ratings.
For financial services providers such as banks, thrifts, and insurance companies, the amount of capital, as measured by the equity to assets ratio, is a key consideration. More capital is better from a regulatory standpoint, but too much cuts down on profitability. Loss reserves are also important, as are funding sources. For lenders, deposits insured by the U.S. government represent a firmer source of liquidity than borrowings. It’s when liquidity dries up that disruption occurs in the credit markets.
It’s important to note that financial strength doesn’t always translate into stock market outperformance. Shares of smaller companies and companies that are more leveraged may have a less desirable financial strength rating but often do significantly better when the economy is emerging from a recession. Since these companies are more sensitive to broader business conditions, their profits stand to rise more on a percentage basis in the early stages of a recovery. But, for investors looking for dividend-paying stocks and stocks to keep for a long period of time, it pays to be aware of a company’s financial standing.