The Value Line Approach
1. Industry RankThe industry rank of 95 industries is found in the first booklet of Value Line contains . Pick stocks with an industry rank in the top twenties. 2. Timeliness and Safety Ranks Timeliness refers to how well (1 being highest and 5, lowest) Value Line thinks a stock will do in the coming twelve months. Safety refers to how safe Value Line thinks that stock is. Stocks ranked 1 (highest) or 2 (above average) for Timeliness and Safety are those you should focus on. About 100 companies at a given time are ranked "1" for Timeliness. From this list of 100 stocks, select 10 to 20 prospective stocks to put on your buy list. Then, you should do more research on these companies to narrow down the list to a smaller potential number of stocks that represent the best value and lowest risk. 3. Beta Beta is an indicator that measures the stock’s sensitivity to fluctuations in the market (NYSE average). A beta of 1 means that the stock price is likely to move up and down at the same rate as the market. A beta of 1.2 indicates that the stock price is likely to rise or drop by 20% more than the overall market. If you are an aggressive investor, you might want to pick stocks with a higher beta like 1.6 because the stock is likely to move up faster in an up market. However, in a down market, a high beta stock tends to come down faster. If you are a conservative investor, pick a stock with a beta close to one like 1.1 or 0.9. 4. Debt Debt shows how much the company owes. For most cases, just make sure that the company has less than 35% of its assets in debt. The lower the debt, the less chance the company will go bankrupt; hence, the safer the investment. Two exceptions are Fannie Mae and Freddie Mac because their business is buying and selling loans. 5. Earning Per Share (EPS) Earnings per share is the company's profit divided by the total number of shares. Value Line lists the stocks' EPS for the prior fifteen years and projects the future EPS for the next two years. As a young investor, you should look for a company with a solid yearly growth rate of 15% or even higher. This 15% indicates a growth stock whose stock price is likely at least to double in five years. (See the Rule of 72.) 6. Cash Flow and Stock Price Value Line uses an estimate of future earnings and cash flow to project a range of stock prices in five years. Cash flow is the money a company has left after paying dividends (bonuses to shareholders).You should look for a project price that at least doubles the current stock price in five years. 7. Price-earnings Ratio (P/E) The P/E ratios is the ratio found by dividing the most recent stock price by the last six months of earnings plus earnings estimated for the next six months. This ratio indicates if a stock is undervalued, overvalued, or the right price. The P/E ratio can be viewed in historical perspective by looking at the 10-year median or the 10-year average of the P/E. A current P/E that is higher than a stock’s 10-year median P/E could mean that the stock is overvalued. You should look into other factors such as expected growth of a company, which is found on Value Line's single page report. If a stock’s P/E ratio is lower than the growth rate, you will not overpay for the stock. For example, as shown in the chart below, the stock of McDonalds was priced at a very high 60 P/E in 1972, but the stock should have sold for a P/E of 92, considering its strong growth from 1972 to 1993.
* Before tax Source : Stocks For the Long Run, Irwin Professional Publishing, 1994. 8. Margin Look for an operating margin and a net profit margin on the company you are researching. Compare these numbers to other companies in the same industry. The higher the margin, the better. High margins indicate that the company has good management and proprietary technologies. For example, Microsoft's net profit margin is usually in the mid-20 percent range, which is very good compared to other companies in the industry, which have a net profit margin of less than 15% on average. 9. Percent Earned on Net Worth Net worth is the total shareholders’ wealth in a company. Percent earned net worth is the annual earnings of a company divided by the shareholders' net worth. The higher this percentage, the better. Look at the historical trend for this ratio and select stocks with a minimum of 15% of future projected earned on net worth. A well-managed company can consistently double this percentage over the years. After you find some companies that interest you, you should get as much information as possible about these companies. You should also find out about the political and economical factors that will affect the profitability of the company. Click here to go to Stock Analysis. Click here for another way for
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The Value Line Investment Survey
(found in your local library in the reference section) provides an easy-to-use format that
gives the relevant statistical and analytical information in a single-page report for each
of 1,700 companies. Using Value Line is the analytical way of picking and
screening stocks. 
