NYT -- Mark Hulbert discussing Value Line bullish signal.
September 30, 2001
STRATEGIES
At Least One Stock Market Signal Is Flashing
Green
By MARK HULBERT
Finally, some solid evidence has emerged
that the stock market plunge may have
gone too far and that stocks should have
average annual returns of about 12 percent
over the next four years.
The data supporting that optimistic assessment
is from the Value Line Investment Survey, an
advisory service published by Value Line in
New York. Value Line is far better known as a
stock-picking service: each week since 1965, it
has rated 1,700 of this country's most widely
held stocks on a scale of 1 to 5, with Group 1 containing the stocks it believes to
have the greatest potential over the next 6 to 12 months, and Group 5 having the
worst prospects.
This stock-rating system has earned Value Line a high performance ranking. In
fact, among investment newsletters tracked by The Hulbert Financial Digest,
Value Line is in first place for risk-adjusted performance since 1980. Even
skeptical academics who have staked their reputations on the idea that the market
cannot be beaten concede that Value Line's record in picking stocks is an
exception that cannot be dismissed.
The Value Line statistic that is the basis of the good news is not as well known.
though it has also been published each week for several decades. Known by its
devotees as the V.L.M.A.P., for Value Line's median appreciation potential, it is
the median percentage by which Value Line's analysts project that the 1,700
stocks they follow will grow over the next three to five years.
While that Value Line measure has been consistently too bullish, it is remarkably
correlated with the stock market's level four years hence. Because Value Line's
analysts focus on a horizon that is three to five years away, their judgments seem
relatively immune to the emotional swings that affect other analysts.
Undoubtedly, the others could also immunize themselves if they also focused on
the longer term, but very few do so.
V.L.M.A.P. is therefore an anchor against which we can assess the stock
market's future course. Historically low levels indicate that the market has gotten
ahead of itself, and that investors who enter it are likely to be disappointed. That
is precisely the longer-term fate of those who entered the market in 1996 and
1997, when the Value Line barometer dropped to levels not seen since before the
1987 crash. Though the caution signal seemed ill timed as stocks continued to
rise throughout 1998 and 1999, the investors having the last laugh are those who
took that signal seriously. Indeed, according to Wilshire Associates, the
combined value of all publicly traded stocks in the country is no higher now than
in October 1997.
In contrast, V.L.M.A.P. flashes an all- clear signal when it rises to historically
high levels. That is exactly what it has done since the Sept. 11 terrorist attacks.
In fact, the last time the Value Line measure was as high as it is now was in late
January 1991. True to form, the stock market rose smartly over the subsequent
four years.
Does V.L.M.A.P.'s current reading, 100 percent, mean that you can expect the
average stock to double in four years? Unfortunately not. Value Line's analysts
are consistently too bullish, according to studies conducted independently by
Daniel A. Seiver, an economics professor at Miami University of Ohio and the
editor of the PAD System Report, an investment newsletter, and Peter L.
Bernstein, president of a consulting firm for institutional investors. Both studies
found that the V.L.M.A.P. had its greatest historical accuracy when 50
percentage points were deducted from it.
That still works out to a four-year price appreciation of 50 percent, however, or
10.7 percent, annualized. Coupled with an average dividend yield of just over 1
percent, that works out to a 12 percent average annual return for the market
from now until September 2005. Though not as huge a return as seen in the wild
growth years of the late 1990's, it looks awfully attractive right now.
Mark Hulbert is editor of The Hulbert Financial Digest, a newsletter based in
Annandale, Va. His column on investment strategies appears every other week.
E-mail: strategy@nytimes.com.
Copyright 2001 The New York Times Company |
