Value from Value Line

05/20/2005 12:00 am EST


Jack Dempsey

Chief Quantitative Strategist, Value Line Publishing

Jack Dempsey is portfolio manager of three mutual funds for Value Line and the group’s chief quantitative strategist. Last year, his Value Line Fund is in the top 3% of all the large-cap funds tracked by Morningstar. Here, he looks at some 1-rated buys.

"Value Line was founded by Arnold Bernhardt, in response to the severe financial losses that his family had suffered during the 1929 debacle. Bernhardt—a securities analyst—had observed that there appeared to be a rather clear relationship between a company’s earnings and its price history. Once this path was determined, one could measure the approximate multiplier of earnings that best described the price history. Applying this multiplier to the annual earnings per share resulted in a line— which came to be known as the value line. Lo and behold, Value Line was born.

"In 1965, we developed formulas to make it easier to measure the relative attractiveness of each company. This process is known as our Timeliness Rank. The major components of this ranking system are a ten-year record of relative earnings and prices, price momentum, quarterly earnings comparisons, and earnings surprise. The system predicts relative price performance over the next six to 12 months. How has this system performed over the last 39 years? Value Line ranks roughly 1700. Of these, 100 stocks are ranked in Group 1, and are expected to be the best performers. Between 1965 and mid-2004—assuming one purchased an equal dollar amount of each of the Group 1 stocks at the beginning of the year and held for 12 months without any changes—a portfolio of 1-rated stocks would have appreciated 14.2% per annum, excluding commissions and dividends.

"When a stock becomes ranked as a '1', that’s when we recommend that you buy it. That’s also when the Value Line Fund would buy it. We sell when the stock becomes ranked a ‘2’. Here, I would like to outline several 1- ranked stocks that happen to be within the technology sector. Websense (WBSN NASDAQ) is the largest provider of employee Internet management. So that if you have a large organization and you want to see how many people are just surfing the web, doing inappropriate things, this is the company that can allow you—as an employer—to manage that. Affymetrix (AFFX NASDAQ) is one of the companies we like. This is a play in the biotech area. The company provides tools and ways to analyze the human genome and that can have a dramatic effect on future cures for medical problems. Cognizant Technology (CTSH NASDAQ) is basically a company that specializes in the full life cycle, moving companies from legacy computer systems to e-commerce. They work with large department stores, manufacturing firms, and so on. Jabil Circuits (JBL NYSE) is a manufacturer of circuit design. Its earnings are growing at 28%. Finally, Oracle (ORCL NASDAQ), the largest database provider, is doing well. CEO Larry Ellison is a pretty strong advocate of his company. But we like that he puts his money where his mouth is, because he owns 26% of the stock. We recommend the stock."

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