Beating Buffett

I love Value Line as a source for stock information. It’s the only place to find a full fifteen years of data in one place that shows monthly stock price movements right above the statistics for that same year. This makes it very useful in seeing how changing fundamentals were reflected in the stock’s price action.

Value Line often tries to sell subscriptions based on their “Timeliness Ranking System” where they assign #1 to their best buys, #2 to their next best expected performers  and #4 and #5 to their stocks to ‘avoid’. #3’s are rated neutral or ‘market performers’.

If their system worked as advertised the #1 ranked issues should be outperforming their #4 and #5 rated stocks. Has this actually happened? Let’s take a look using Value Line’s own numbers as listed in their July 30, 2010 issue (released on line July 26^th).

The source for this data is right from the current issue of Value Line.

In seven of the past ten years (including 2010 through June 30^th) the must-avoid #5 rated shares have significantly outperformed the top-rated #1 ranked stocks. In six of those ten periods the #4 ranked stocks did better than Value Line’s #1 ranked issues.

After a decade long losing streak like this I am hoping that the newly installed management figures out what has been going wrong and adjusts their methodology.

Value Line’s own shares {VALU:$15} look extremely cheap sporting a better than 5% yield and a debt-free balance sheet.

Disclosure: Author is long VALU shares.

It’s rare when a well-known name can be as far under-the-radar as Value Line is right now. This company was incredibly mismanaged due to the former CEO being installed due to family connections rather than on merit. That CEO is no longer attached to the company.

    VALU is debt free and held $64.89 million in treasury cash as of January 31, 2010 with only 9.98 MM    shares outstanding. Dividends have been paid each year since 1983 with the most recent normal quarterly payout at $0.20 /share. A Special one-time dividend of $2.80 was declared and paid in the most recent quarter [$3/share including the normal payout].

The company is solidly profitable. Fiscal Q2 came in at $0.23 and Q3 at $0.36/share. Here is the latest estimate information for the FY just concluded and the current FY.

There is only one analyst even bothering to cover VALU right now. Based on the expected results VALU, now trading at $14.60, is offered for 10x last year’s operating earnings (excluding a non-recurring SEC settlement charge) and 9.6x forward EPS. Compare those multiples with their historical norms from the chart below to see just how cheap they are selling for right now.

If the present rate of dividends continues their current yield is a well-covered and very attractive 5.48%.

Read more…

 Value Line [NDQ:VALU - $22.89] provides investment advisory services to mutual funds, institutions and individual clients, and publishes investment-related periodicals. The Value Line Publishing subsidiary publishes investment advisories that rate and evaluate common stocks, options, mutual funds, and convertibles. Value Line also produces investment-related software and manages a family of mutual funds, pension funds, institutional and individual portfolios through Value Line Asset Management.

The company’s investment advice can be found in almost any good-sized library in America as well as on the shelves of virtually every American brokerage firm. The company recently paid a $47,706,000 fine to settle with the SEC regarding a variety of mutual fund practices that were not related to their core business of providing investment related information. Jean Bernhard Buttner resigned as CEO and Chairman over this issue last November and was replaced by Howard Brecher, Value Line’s Chief Legal Officer, who became the Acting Chairman.

The fiscal third quarter showed decent results with earnings (excluding the SEC settlement) of $0.36 per share versus a $0.27 estimate and year earlier EPS of $0.38. The lone analyst covering Value Line stock now carries FY 2010 (ends April 30, 2010) and FY 2011 estimates of $1.45 and $1.52 excluding the one-time charge.

Even after paying the large SEC fine Value Line remains debt-free and holds about $14 million in treasury cash. The dividend had been $0.40 quarterly through January 2009 but was cut to $0.30 in April last year and to $0.20 quarterly last July when the need to conserve cash for the settlement became defined. I think the attractive current yield of 3.5% is now sustainable.

Here are the per share, fully diluted, numbers from continuing operations for the FYs 2005 – 2009 as reported by Morningstar:

Clearly, Value Line has ‘earnings power’ of at least $2 per share in normal times. Excepting the November 2008 – March 9, 2009 meltdown period Value Line has almost never traded below about 15x earnings. Now that the SEC matter is behind the company and with new upper management in place I think Value Line can get back to much better earnings and a $30 - $40 share price again. Is that a reasonable target? Value Line shares hit peak prices of between $39.98 and $57.70 during each of the past five years. They touched $36.52 as recently as last summer.

With a clean balance sheet, a higher-than-CD-rate yield and a well entrenched market position, there appears to be little risk of a serious decline from today’s closing price of $22.89. VALU touched a new 52-week low during today’s trading, getting me interested in taking a position.

Read more…

Value Line released its own figures for the record of their timeliness rankings for 2009 in their Jan. 29, 2010 edition [available on-line today].

In the Value Line system Group 1’s are their highest rated stocks for year-ahead performance and Group 5’s are their ‘must sell’ projections for the worst year-ahead price action.

Here are the dismal results for those that actually followed their advice:

If you followed their recommended strategy of buying/holding only shares ranked 1 & 2 for timeliness and selling those ranked 4 & 5 you had the worst possible results last year whether you adjusted or didn’t adjust throughout that very volatile environment.

In today’s new issue of Value Line they also reviewed how various stock market strategies performed last year. Once again the Group 1’s underperformed in a big way.

I am a long-time subscriber to Value Line as a great source of stock information in what I see as the most useful format in the industry. I am, and have been, a long-term critic of their momentum based timeliness system.

Use the data. Ignore the timeliness ranks.

See the 10-year data in the comment that follows…

Disclosure: None

Read more…