Educational Programming Video
The Value Line Investment Survey
Program 15: The Statistical Array - Part 3
In this session we will continue our discussion of the information contained in the part of a Value Line page that we call the Statistical Array. This is the section of the report that contains a wide range of financial statistics, usually for many years in the past and a number of years going forward. For purposes of this discussion, we will refer to a "standard" industrial-type company, not a company with somewhat more unusual accounting terms or practices, such as a bank, an insurance company, or a utility.
The first item we will mention is the Average Annual P/E Ratio, which appears about halfway down the array. This item shows the multiple of earnings that investors have been willing to pay for a stock in the past and the P/E ratio that Value Line's analyst expects a stock will trade at 3 to 5 years in the future. The historical numbers are calculated by taking the average price of a stock in each company's full year (either a calendar year or a fiscal year) and dividing the average price by the share earnings reported for the year. Investors occasionally ask us how we calculate the average price. We do it by taking the closing stock price on each Wednesday during a company's fiscal year, which is not necessarily its calendar year. We add all the weekly closing prices together, and then divide by 52.
It is worth noting that the P/E ratios of many stocks, particularly those involved with technology, communications, biotechnology, computer software, and the Internet, have soared to unprecedented levels in the past few years. Are they going to stay at these levels? Well, obviously, no one knows, but in at least some cases, our analysts think the P/E ratios will return to a more normal (or lower) level in the future. If the P/E is expected to be much lower 3 to 5 years from now than it is currently, that lower P/E will result in a stock price that will be considerably lower than it would be if the P/E remained high. If you disagree with Value Line's projections, it is very easy for you to insert your own forecasts in place of ours. For example, if you think the P/E of a stock will be 35 3 to 5 years from now, but our analyst thinks the P/E will be 25, you can simply insert your own figure and calculate the stock price that you expect.
Just below the average annual P/E ratio is the Relative P/E Ratio. This ratio compares the average annual P/E ratio of one company with the median P/E ratio of all the stocks in the Value Line universe of 1,700 companies. If the relative P/E ratio is higher than 1, it means that the P/E of a stock is greater than that of the median. If the relative P/E ratio is less than 1, it means that the P/E of a stock is less than that of the median.
If one stock is selling at a P/E that is much higher than the Value Line median, the stock may be overpriced, and the reverse may also be true. However, it is worth noting that many stocks, and industries, for that matter, traditionally sell at either high or low P/Es relative all other companies. For that reason, we strongly suggest that investors who are using the relative P/E ratio as part of their analysis look at the historical figures. If a particular stock has regularly sold at a high or low P/E ratio, there may well be reason to think that it will continue to sell at a similar ratio for some time to come.
The next line contains the Average Annual Dividend Yield. This yield is calculated by dividing the dividends declared per share for a year by the average stock price for the same year. By looking at this line, an investor can get a good idea of the "typical" yield for a stock. If a stock's current yield (shown at the top of the Value Line page) is much lower or higher than it has generally been in year's past, the stock may be somewhat attractive or unattractive at the current time. However, it is worth noting that American companies have been tending to pay smaller dividends in recent years. That is one reason why many stocks' yields are now lower than they were previously.
We will continue the discussion of the items in the Statistical Array in the next session.
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