Jason: Value line research is investor's best friend
Last week, the Dow Jones industrial average crossed the 16,000 mark, an all-time high. Investors who have been sitting on the sidelines since the depths of the financial crisis have missed out on a great run. The Dow bottomed out at 6,547 on March 9, 2009.
The question facing individuals now is whether it's too late to get into the market.
One tool to gauge the market is "appreciation potential," which is published by Value Line, an independent research house that I call "the individual investor's best friend." Value Line, founded by Arnold Bernhard in 1931, publishes research for individual and institutional investors.
Appreciation potential is Value Line's read on the stock market's future, three to five years hence, and is based on current conditions and prospects of the economic environment.
At this time, Value Line's three- to five-year appreciation potential is just 30 percent. To give you context, at the bottom of the market on March 9, 2009, appreciation potential was 185 percent.
There are two more measures Value Line uses: price/earnings ratio and dividend yield (average for all stocks in the Value Line Investment Survey that pay a dividend).
At this time, the average P/E of all stocks with earnings measures 18. At the market low on March 9, 2009, it was 10.3. The average dividend yield is now 2 percent, compared to 4 percent at the market low.
Taking these three measures together, a reader might conclude that there may be better times to jump into the market. But, "there are reasons for optimism," according to Value Line.
"U.S. equities are enjoying one of the best years in a couple of decades, despite ongoing fears that the Federal Reserve will soon begin to taper its aggressive monetary stimulus," says Value Line.
"Moreover, inflation remains tame by historical standards, which should ease concerns that the central bank will embark on a serious tightening campaign. (Short-term interest rates are apt to stay near zero for a few more years.) And the economy appears to be strengthening gradually, with the latest positive news being a surprisingly large decline in weekly jobless claims."
Aside from market commentary, Value Line can help you with stock selection. Let's say you are a conservative investor who wants good-quality stocks with low risk. In "Selection & Opinion," you can find a screen of "Timely Stocks with Low Risks."
The screen puts to use some of Value Line's proprietary rankings.
Timeliness is Value Line's measure of the relative price performance of a stock over the next six to 12 months. Earnings momentum and recent stock price performance are two of the key variables. Timeliness ranks range from 1 (highest) to 5 (lowest). At any one time, 100 equities are top-ranked for Timeliness.
Safety measures potential risk associated with individual stocks. Safety ranks also range from 1 (safest) to 5 (least safe). Value Line recommends that conservative investors limit their purchases to stocks ranked 1 or 2 for safety.
The screen started by looking for companies rated favorably (at least 2) for Timeliness and Safety.
Next, the list was narrowed to those with an Earnings Predictability score in the top 10 percent of the 1,700 stocks in the Value Line Universe.
Then, stocks whose dividend yields were less than 3 percent were cut.
The results? A short list of only 11 stocks that are defensive in nature, meaning stocks that have a likelihood of continuing to pay a dividend in all types of markets. Three bank stocks, one thrift, two oil/gas distributors, two telecommunications companies, one tobacco stock, one drug stock and one electric utility made the cut.
"The potential for further ups and downs in the stock market, despite the improving, though uncertain, growth prospects for the economy, often makes members of a group of this type attractive," according to Value Line. "In all, the general nature of the stocks in this screen should hold some allure for those investors on the conservative side."
You can see that this type of screen can be very useful for more-cautious investors who need income.
If you would like to read more about it and others, log onto http://www.valueline.com and sign up for a free trial. Then, go to Selection & Opinion for Nov. 29, 2013, and look up "Timely Stocks with Low Risk."
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments (firstname.lastname@example.org).