Timeliness Rankings, Part 2
by Jim Stevens (JimStevens@aol.com)
Burlington, VT (May 20, 1999) -- Monday in Timeliness Rankings, Part 1, we looked at Value Line's system of ranking stocks for expected performance over the next 6 to 12 months and how an investor might use that universe as a pool of companies for a market-beating investing strategy.
We've learned that Value Line does a fine job of attaching a nice understandable rank to each stock in their weekly survey. Their ranking system is objective, consistent, and grounded in the logic of proven numerical criteria for selecting winning stocks.
All that sounds just great so far, but before the Value Line picks could be used for the Workshop strategies, one more question had to be answered: Does the Timeliness Ranking system work? We'd need a lot of late nights and some robust computing power to check that out. But wait -- those pocket protector-wearing data junkies at Value Line have done the work already!
Value Line has been ranking stocks for Timeliness since April 1965. They last updated their performance record as of the end of 1998, so the history is now close to 34 years long. Hypothetical portfolios of each rank of stocks, if purchased on January 1 and held for a year, would have had annual growth rates as follows:
Timeliness Compound Annual Difference between Rank Growth Rate Ranks 1 15.92% 2 12.80% (1-2) 3.12 3 9.58% (2-3) 3.22 4 6.42% (3-4) 3.16 5 2.81% (4-5) 3.61Both the number-1 and number-2 ranked groups look pretty good when you consider that the Dow Jones Industrial Average (DJIA) grew at 12.05% over the same time period and the Standard & Poor's 500 Index grew 12.19% annually. The smoothly graduated increments of decreasing performance as you move down in Timeliness Rank shows what looks like a time-tested correlation between Timeliness Rank and return.
As mentioned, the above record doesn't allow for changes in the portfolios through out the year. Value Line also tracks the performance of their ranking system allowing for changes in the stocks with each weekly re-ranking. The number-one ranked group in this record turned in even more impressive returns:
Timeliness Compound Annual Rank Growth Rate 1 20.40% 2 11.98% 3 4.27% 4 -1.81% 5 -9.86%Looking at both tables, I think you can see why the idea of limiting an investment strategy to stocks from the first, or the first and second, Timeliness categories makes sense. These numbers show Value Line's formula has been quite successful at stacking the top-ranked groups with more high performers and kenneling more of the dogs into the lower-ranked pens.
Now that we have a foundation of quality stocks, the stage is set for investors to crank up the power tools and devise ways to choose standouts from among the growth stock elite.