Value Line investment survey

Value Line Investment Survey: A Review

Published on:
October 12, 2019
Reading time: 9 Minutes
Last Update:

Written by

Noam Ganel is the voice behind Pen & Paper, a value-oriented stock research publication. He  serves as  Vice President in Capital Markets at Silvergate Bank and holds the Chartered Analyst Credential (CFA).

Value Line's history

How the Value Line report started is the story of turning setbacks to blessings. Arnold Bernard, the company's founder, was fired at the peak of the Great Recession. "You can have no idea what it meant to be out of a job in 1931," he said. "Nothing like today, when you can read and write, you can get some work - and you can get Social Security too." The Great Crash led him to work on what would eventually become the value line rating theory [1].

Value Line's early days were humble. Bernard reached out to local banks and other financial institutions and could not make a single sale; he valued the product, at the time a book, at $200. But L.L.B. Angas marketed the book for $55. Even at that low ball price, there we no buyers.

Fast forward fifty years. The New York Times wrote about Bernahrd that "His [Bernhard] approach contradicted the 'efficient market hypothesis,' which holds that information is reflected in stock prices so quickly that no attempt to beat the market can succeed in the long run." Indeed, Bernhard was one of the first investment contrarians simply because he was skeptical of the markets being efficient.  

The Value Line company

The Bernhard family still holds 89.34% of the common stock. Value Line became a publicly-traded company in 1983 and trades under the symbol VALU on Nasdaq. Subscription revenue was $28 million in fiscal yearend 2019 [2]. Revenue from print subscribers was $13 million, and revenue from digital subscribers was $15 million. In 2019, Value Line was able to attract 13% new members; renewal fees were 87% of the revenue.

Value Line does not publish the number of subscribers. I estimate the amount of subscribers today is about 70,000 to 80,000 [3]. While a significant number, the company had a much larger subscriber base in the late 80s. In the Bernhard's obituary, written over three decades ago, it was said that the subscriber base was 134,000.  

While the Value Line company is mostly associated with the Value Line Investment Survey, it has substantial investment management services business. In 2019  this business contributed $7 million - about 25 percent of  - the company's revenue. Value Line, through its various mutual funds, oversees over $3 billion has in assets.

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The Value Line reports

The flagship product is the Value Line Investment Survey (VLIS), which comes in both print form and digital form. The print version arrives weekly, and the digital version is updated daily. VLIS covers about 1,700 stocks, from small-capitalization stocks to large-capitalization stocks [3]. In a typical Value Line report, you will find coverage of household companies such as Amazon and Apple, but more often than not, you will discover under-the-radar companies such as Raven Industries or Stantec Inc.

The VLIS is a one-page report that covers a lot. It has 15-years' financial information;  it highlights profitability metrics such as net profit margin and returns on equity during; it allows the reader to quickly sift through the company's key growth metrics.; And it shows how much investors valued in the company over the past decade. The bottom section includes details such as recent developments in the company's business and valuation.

The VLIS report's brevity allows the reader to understand an industry and its key players quickly. Consider the human resources industry.  The Value Line report covers 12 companies in this line of business. Reviewing the one-page reports allows the reader to quickly answer questions such as what is the operating margin for the industry as a whole? Are sales increasing? Which company has been growing the most? What is the current valuation of the Human Resources Industry compared to a decade ago?

Value Line Investment Survey allows the reader to quickly understand an industry's operating fundamentals.

Value Line offers other niche products. Since June 2011, it sells readers a report focused on dividend and growth companies. This report aims to find companies expected to provide above-average earnings yield glossary.

In May 2017, Value Line began to publish a report which recommends the best exchange-traded funds (Write to me if you would like to know more about exchange-traded funds.)

The company also offers a special situation report which aims to find undervalued small- and mid-cap stocks with upside potential.

The print version of the Value Line report costs $598 a year. Adding digital access will increase the annual price to $718. The dividend income & growth, which is a separate report, costs $795. The Value Line Select ETF costs $395. The Value Line Special Situations costs $198.

Download .PDF version of the Value Line report to experience the look and feel.

How Value Line is different from Morningstar

Three features make Value Line different from Morningstar. First is the design of the product itself. Or what can also be understood as 'The medium is the message', a term the late Marshall McLuhan coined in Understanding Media: The Extensions of Man. His main point was to understand a message you need first to understand the medium. The logic applies here.

Value Line reports resembles a book. Not a trading floor.

The Value Line Report was designed for print while Morningstar was intended for the web. Print content cultivates patience. Digital content rushes us to act. And today, more than ever, "Patience is the thing in short supply," said value investor Joel Greenblatt told to the Wall Street Journal in A Value Investor Defends Value Investing.

Visit the Morningstar website, and you will see the flashing color of red and green, various calls to "act now or miss out." Value Line, on the other hand, with its dull, plain black and white format, resembles a book, not a trading floor quote.

Morninstar website has too much information
Too much information on Morningstar.

Another difference is that Value Line allows us to understand an industry while Morningstar's emphasis is on individual companies. For instance, if you believe the investment management industry is experiencing tailwinds [4] then Value Line allows you to sift through the key players in the investment management industry and to compare their operating fundamentals.

The fourth difference between Value Line and Morningstar is scope. Value Line focuses on U.S. based companies, specifically on the common stock of these businesses. The philosophy behind Value Line is that individual investors can understand enterprises and can decide on their own.

Readers of Morningstar, however, have a broader interest in capital markets. Morningstar covers capital markets topics from fixed income products to option trading. And Morningstar's philosophy is that investors are best to let investment professionals make the decisions.

Hence, Morningstar's emphasis on rating mutual funds and their yearly performances. Ultimately, this chase after the best performing funds leaves investors with poor results. Visit Business Insider's discussion on the topic: past performance of a mutual fund is not an indicator of future outcomes.

Valueline will fit nicely in a value-investor's desk
Valueline will fit nicely in a value-investor's desk

How to use the Value Line Investment Survey

To me, the Value Line Investment Survey is a stock screener. Every week I review about 50 one-page reports and typically find a company or two that I would like to understand more [5].

For every 50 one-page reports, I typically find three- to five companies that have great business models but are just too expensive to buy. So I add these companies to a list called inventory of ideas, an idea I copied from Michael Shearn's excellent book, The Investment Checklist.

My secondary use of the Value Line Investment Survey is just game-playing. I like to compare and argue with Value Line analysts' estimate of what the company will be worth in three- to five years. For example, Simon Shoucair of Value Line estimated that Ethan Allen (ETH on Nyse) would show $39.6 in revenue per share by 2022 to 2024, a 5-year CAGR of 6.5%. But to me, that was odd assumption since in 2014, revenue per share was $25.81, and in 2018 revenue per share was $28.9, merely a 5-year CAGR of 2.5%.

Reviewing competitors on the Value Line Investment Survey is now an integral part of my onboarding process [6]. Not unlike real life, it is easy to fall in love. If I spend a week or two researching a particular stock, it is difficult not to buy the stock since I invested so much time and effort in understanding the business and its management.

But that is a mistake. So now, I read about competitors while researching a specific business. The constant comparison allows me to find similar companies that are trading at a comparable price with, perhaps, better growth opportunities.

Finally, the Value Line Investment Survey is an educational tool. It exposes the reader to unpopular industries. Value Line not only comments on the industry as a whole but allows us to compare the industry's fundamentals via a review of the major players. I don't know of a better resource for that academic exercise.

I have other uses of the Value Line Investment Survey. Write to me if you would like the complete list.

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Who else uses the Value Investment Survey  

In the Berkshire Hathaway 1998 annual meeting, Marc Gerstein asked Warren Buffett how does he manage to review the whole spectrum of choices in equity markets. Buffett's answer was:

"I have yet to see a better way, including fooling around on the internet or anything, that gives me the information as quickly. I can absorb the information on - about a company - most of the key information you can get - and probably doesn't take more than 30 seconds in glancing through Value Line, and I don't have any other system that as good."

Charlie Munger added:

"Well, I think the Value Line charts are a human triumph. It's hard for me to imagine a job being done any better than is done in those charts. An immense amount of information is put in a very usable form. And if I were running a business school we would be teaching from Value Line charts."

I learned about Value Line while reading Mohnish Pabrai's The Dhandho Investor. There he wrote that "Value Line publishes a weekly summary of the stocks that have lost the most value in the preceding 13 weeks.

The Value Line Investment Effect

Not unlike Berkshire Hathaway, The Value Line Investment Effect is considered a market anomaly [7]. In 1982, researchers Copeland and Mayers found that between 1965 and 1978, the Value Line rankings showed statistically significant abnormal returns when compared to the market model. Researchers David Porras and Melissa Griswold then extended their work to the period between 1982 to 1995 and found that indeed, the market anomaly held. Read their findings in The Value Line Enigma Revisited.


Not unlike the performance pf Berkshire Hathaway, The Value Line Investment Effect is considered a market anomaly.

What Porras and Griswold found was that Value Line did well in picking out "winner stocks" but did excellent work in removing "loser stocks." The loser group of stocks had deteriorating financials. If there one thing you take from this article, it is that Value Line keeps the reader informed.

Staying informed is important. It is quite easy to buy a stock; it is much harder to hold it and mainly when to sell the stock. For Marty Whitman, founder of Third Avenue Management, one of the selling triggers was an impairment loss. On page 110 of Value Investing, ✨ he wrote:

"Permanent impairment means that there has been a fundamental deterioration of the business: good finances have been dissipated, new products and new competitors are beaten up, and the industry is becoming obsolete, key management members are lost, and so on."


A few concerns about the Value Line report

The Value Line report overlooks global markets. And to look at U.S.- based companies only is akin to searching for something where it is easiest to look, the streetlight effect. (Write to me if you would receive a few resources on global investing.)

Value Line proprietary ranking for Timeliness and Safety is not absolute. There is no universal definition of what an attractive stock is. What may be appropriate for a 40-year investor may not be right for a 70-year old investor. Value Line readers must come up with their own, unique ranking for what constitutes an appropriate investment.  

Readers of Value Line should have their own ranking system.

For example, when I wrote about Bon Ton stores I defined cheap stocks as "a stock that trades: (1) at an earnings multiple that is lower compared to its earnings multiple over the past decade, (2) at a substantially lower earnings multiple compared to its peer companies, and (3) at a purchase price below its net tangible asset per share."

Finally, the one-page report should serve as the starting point and not as the endpoint. Today, in our service-oriented economy, the book value of companies reveals little about their economic worth. For instance, you will not find the value of Google's engineers and company culture [8] in their reported book value. Also, investors must understand the quality of earnings and not just the reported earnings.

Reported earnings are subjective. They include too many assumptions: from loan loss projections for financial institutions to impairment loss. The only way to get closer to the economic truth is to read the notes to the financial statements found in the publicly-available annual reports and to understand the earnings quality.

Disclaimer

Value Line did not sponsor any of the content written in this article. Pen&Paper is independently and wholly-owned by Noam Ganel, C.F.A.

Our freedom allows us to write about what we believe may be valuable to you. We don't earn affiliate marketing revenue without letting you first know about it.  And when we do, for example, if you purchase any of the books mentioned in this article, we give back 100% of the proceeds. Contact us if you have any questions.

We also don't have any positions in the common stock of Value Line. This article, like many others, is part of what constitutes the value- investor mindset: sharing with the community valuable information.

Or, as Charles Schwab said, "making investing accessible to all." 

FOOTNOTES
[1] The rating theory uses regression analysis to value stocks.
[2] Value Line fiscal year ended April 30, 2019
[3] Capitalization is the number of outstanding shares multiplied by the share price.
[4] If the wind is at your back, helping you to move forward, you experience tailwinds.
[5] Understanding means reading the 10-K, 10-Q and 8-K financials, among other things.  
[6] The onboarding process is a set of checklist items I go through before buying a stock.
[7] Market anomaly demonstrates inefficient markets.
[8] Company culture is one of Google's competitive advantage
rankings such as Timeliness and Safety