Educational Programming Video
The Value Line Investment Survey
Program 5: Value Line Ranks
In our last session, we reviewed Timeliness, the Value Line rank that measures the likely relative price performance of all stocks followed in The Value Line Investment Survey.
Our focus in this session is on two other Value Line ranks, Safety and Technical, as well as Beta. Each of these three items appear in a box in the upper-left hand corner of a Value Line stock page.
Safety is a measure of the total risk of a stock, and just as with Timeliness, we rank it from 1 (highest) to 5 (lowest). It is actually derived from two other figures found in the lower right hand corner of each page. One is a company's Financial Strength; the other is a stock's Price Stability.
Financial Strength is a measure of a company's financial condition. Generally speaking, the largest companies with the strongest balance sheets, the least amount of debt, the lowest interest charges and the best financial ratios get the highest scores. In many ways the Financial Strength rank is similar to a bond rating. Value Line's Financial Strength ranks go from a high of A++ to a low of C. B+ is Average.
A stock's Price Stability index is a measure of the volatility of weekly percent changes in the price of a stock over the last five years. The lower the volatility, the more stable the stock. The higher the volatility, the less stable the stock. This index goes from 100 down to 5, in increments of 5. Stocks in the top 5% (those with lowest volatility) carry a Price Stability index of 100; the next 5%, 95; and so on down to 5. 50 is Average.
Generally speaking, an equity has a high Safety rank when a company's financial condition is solid and the stock has been relatively stable. Stocks with Safety ranks of 1 and 2 tend to be most suitable for conservative investors. Stocks with Safety ranks of 3 are average. Those with Safety ranks of 4 and 5 have above-average risk.
It is important to understand that Safety is not a projection of stock price performance. When Value Line ranks a stock 1 or 2 for Safety, we are in no way suggesting that the stock is a good buy. Our research has shown, however, that stocks with Safety ranks of 1 and 2 have fallen less than other stocks in declining stock markets. If we are in a down market or if you think stock prices will be falling, you may want to switch to stocks with high Safety ranks.
If you are an investor who generally feels uncomfortable taking a lot of risk, an investor who doesn't want to own stocks that are extremely volatile, or an investor who likes to "sleep well" at night and not worry about your investments, you should own stocks with Safety ranks of 1 or 2, or even 3, but certainly not Safety ranks of 4 or 5.
Now, I will talk about Beta, which is a statistic that measures the volatility, or risk, of a stock. The Beta indicates a stock's price sensitivity to overall fluctuations in the stock market. A Beta of 1.10, for example, means that a stock will tend to move 10% more than the market as a whole in whichever direction the stock market moves. (In this case, the proxy for the "stock market" is the New York Stock Exchange Composite Average, which is recognized as being representative of a broad section of the equity securities markets. A Beta of 1.00 signifies that the stock can be expected to move in line with this composite.)
A stock with a very high Beta1.50 would be such an exampleis highly sensitive to market swings. In a rising market, this is a plus. In a declining market, the opposite would be true.
That's it for now. In our next session, we will begin to talk about Value Line's financial and stock price projections.
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