Timeliness Rankings, Part 1
by Jim Stevens ([email protected])
Burlington, VT (May 17, 1999) -- One of the questions that pops up early and often from Workshop visitors goes like this: "The backtested returns of the WOW5 screen look phat, dude, now what the heck is a stock ranked number 1 or 2 for Timeliness?" Today we review everything you always wanted to know about Timely stocks and were hardly ever afraid to ask!
A critical ingredient of any mechanical investment strategy is a nice crisp group of good, sound stocks that the mechanical screen can set out to beat -- a "universe" of possible screen candidates, if you will. For example, The Dow Dividend strategies start with the thirty Dow Jones Industrial Average stocks. A strategy that selects from a limited number stocks is much easier to backtest and implement than one that attempts to mechanically screen the entire stock market. "What's a backtest," you say? Hang on. We'll explain backtesting in a future episode.
Back to this Timeliness thing. It turns out that there are groups of stocks out there that already beat the market. So beating them pretty much guarantees a market-beating strategy. One such group is comprised of stocks ranked high for "Timeliness" by the busy folks at The Value Line Investment Survey. These revved-up growth stocks are quite a different breed from the relatively stodgy Dow stocks, which makes a screen of them a nice complement to a Foolish Four portfolio for someone who wants to expand into growth companies.
The Value Line Investment Survey is a printed subscription publication that analyzes and reports on quantitative financial data for 1700 stocks every week. It has also been available as an "electronic" subscription for a few years -- you can download their data right to your computer. Reportedly, these 1700 stocks represent about 94% of the combined total of equity trading volume on all U.S. markets. So we are starting with a pretty good "universe" of stocks, although many very small companies that could be great growth prospects are not included.
Timeliness Rank is Value Line's main measure of a stock's "probable price performance during the next six to 12 months on a scale from 1 (highest) to 5 (lowest)."
While the actual formula for Value Line's ranking system remains their trade secret, they do say that it is generated with a computer program whose input is only "actual and known data." In other words: numbers only -- no opinions. They do share the inputs to the ranking program, which according to the Guide to Using The Value Line Investment Survey are long-term trends of earnings, prices, recent earnings/price momentum, and earnings surprises.
The five Timeliness Rank categories don't include equal numbers of stocks. There are 100 companies in rank 1 (highest), 300 in rank 2 (above average) and then 900, 300, and 100 ranked in the 3 (average), 4 (below average), and 5 (lowest) categories, respectively.
Each week, for the price of a subscription or the gas to get to the library (much cheaper!), you can see how Value Line ranks their 1700 stocks. Most of our screens start with the stocks ranked 1 or 2 for Timeliness. So a typical screen might start with 400 of the largest companies traded in the U.S. that have the "best numbers" for future growth. Then we look for ways to pick just 5 or 10 really good possibilities from that group.
Tune in Thursday, when we will review the performance history of the 5 groups. I think you'll see why the stocks ranked high for Timeliness are a good place to start when developing our Workshop strategies.
Have a great week!