Investment Education

Information to help you become a well-informed investor

Since 1931, Value Line’s investment research has played a key role in the decision-making of countless investors of all types. Value Line was built on our founder’s passion for discipline and objectivity as it applied to the basic analysis of a company’s financial statements. With a foundation rooted firmly in integrity, it is only natural that Value Line is committed to helping all investors make more informed investment decisions using the most thorough, unbiased investment research available.

In support of our mission, "Value Line University" was created to help investors take the same principles and passion and apply them to their own investment portfolios.

Value Line University

Value Line has been providing investment research since 1931. Value Line was built upon our founder Arnold Bernhard's passion for discipline and objectivity as it applied to the analysis of a company's financial statements. Value Line University was created to help people take that same passion and apply it to their own investment portfolios. Value Line University is structured in four parts.

Part 1: INVESTMENT BASICS — Designed to provide an introduction to the sometimes complex subject of managing your money. There are three basic types of investments, also known as asset classes, all of which we are going to discuss. These investments are stocks, bonds, and cash. You can buy stocks and bonds as individual investments, or you can invest in them by buying mutual funds or exchange traded funds (ETFs) that own stocks, bonds, or a combination of the two. If you invest in cash, you can put money into bank accounts and money market mutual funds or you can buy what are known as cash equivalents: US Treasury bills, Certificates of Deposit, and similar investments. While you may not think of bank accounts as investments because they currently pay such a low rate of interest, technically any time you use the money to make more money, you are investing. On the other hand, stock-based vehicles have been the more profitable investment over time.

>> Stock Overview

Buying stock makes you a part owner of the corporation that issued the stock. In the past, stocks have offered one of the greatest long-term investment returns, in large part because of the strength of the US economy which has been reflected in the growth of US corporations and the price appreciation of corporate stocks.
When a company prospers, investors who own its stock can make money in two ways:

Current income, if the company pays part of its earnings to shareholders as dividends;
Capital appreciation, if the price of its shares increases.

Since there is no limit as to how much a company can earn or how high its stock price can go, there is no limit as to how much return a stock investment can provide. Similarly, there is no limit as to how long you can own a stock and continue to benefit from its increasing value either through dividend income or price appreciation. You might also think about stocks as a way to build your estate by leaving them to your heirs in your will or through a trust. Stocks, also known as equity investments because they give you ownership, can pose risk as well as the opportunity for profit. That's because their price fluctuates in response to what is happening in the company that issued the stock, in the industry of which the company is a part, and in the economy as a whole. If you sell a stock at a time when the stock market or an individual stock price is down, you might have little or no profit, and you could even lose some, most, or all of your principal investment.

>> Stock Prices

There are two reasons why a stock's price goes up or down.

The first is the future financial outlook of the company issuing the stock. If it seems likely that a company's earnings will grow at a healthy rate, investors will probably be willing to pay higher prices to own its stock. On the other hand, if it seems that the company is struggling to grow its sales and earnings, investors will be less interested in owning the stock and its price may drop or, at best, remain relatively stable.
The second reason a stock's price goes up or down is related to the general state of the stock market. If the market is booming, stock prices typically go up. But if the market is falling, many stocks often drop in price, regardless of the future financial prospects of individual companies.

While it is very difficult to anticipate the general movement of the stock market accurately, investors can study the market by reading about it in the Selection and Opinion section of The Value Line Investment Survey^®. You can study individual stocks using the information provided on the Value Line page. We know of no source that gives more concise and detailed information.

>> Expectations

Professional analysts and individual investors tend to change their expectations about individual corporate earnings in response to new information about the health of the economy in general. If investors expect boom times, they are often willing to pay increasingly higher prices across the board for stocks. But if they expect a recession to occur, they will assume that many businesses will suffer slowdowns and earn less money. In this case, stock valuations are likely to drop. For example, if the economy is weak and people are being laid off, or are afraid of being laid off, they are less likely to be buying new cars. So investors will lower their expectations for automakers' earnings. Similarly, if fewer cars are being manufactured, automakers will buy less steel. That means steel companies can be expected to earn less.

How does that translate into investment decisions?
In this scenario, the stock prices of automobile and steel manufacturing companies are likely to decline as investors shy away from them.

In a serious recession, prices of stocks in vulnerable sectors will continue to drop and drag the entire stock market down. But in a more typical situation, when the price drops to a certain level, investors once again see the stock as a promising opportunity to make money and begin to buy again. A parallel situation typically develops with the automobiles themselves: Since they are not selling, the company lowers the prices. In all but the worst economic conditions, this encourages people to buy. An upward swing of the economy begins and investors who have bought stock in the automobile company when its price was depressed see the price, and their returns, begin to climb.

Investors also know that every business is not affected equally by a recession. Even in a recession, people still brush their teeth. So the earnings of companies that manufacture toothpaste probably won't suffer as much during a recession as those companies in the automobile and steel sectors. That means that their stock prices aren't likely to drop as far and may even remain strong since they represent one place to make money unless the economy as a whole slips into a deep recession or a depression.

On the other hand, when times get better, people don't brush their teeth any more than they did when times were bad. So unless the toothpaste company can introduce new products or increase the price of the toothpaste significantly, its earnings are not likely to increase in a boom period as rapidly as earnings in more cyclical industries.

>> Interest Rates

Fluctuations in interest rates usually affect the stock market. That's partly because the level of interest rates affects the appeal of stocks versus bonds. When interest rates are high, bonds are more attractive relative to stocks: when interest rates are low, bonds become less attractive relative to stocks. But it's also because a change in the level of interest rates can affect corporate profits.

Higher interest rates often mean lower profits. If interest rates rise, companies have to pay more to borrow the money they need to grow. Eventually that translates into higher prices for their goods and services and, often, slower sales, especially if consumers are buying on credit and have to pay higher interest rates themselves to borrow. Potential customers may decide they can't afford to buy.

The eventual decline in corporate sales and earnings is something investors anticipate as soon as interest rates go up. The result is that stock prices may go down even before the effects of the increased interest rates are actually felt on the company's bottom line. The reverse happens when interest rates fall. Company borrowing costs are lower, so their profits on the same level of sales will be higher. And customers who buy on credit are more comfortable buying if they are paying lower rates, so they buy more. That increases sales and ultimately means higher corporate profits. Higher profits typically result in higher stock prices. In this situation as well, investors are usually ready to pay higher prices for stocks as soon as interest rates drop in anticipation of the cycle of increased profits.

>> Bond Overview

Bonds are financial obligations of corporations, governments, or government agencies. The issuer usually pays periodic interest to the bondholder and is obligated to repay the value of the bond at a specified time (known as the maturity date).

Short-term bonds normally have maturities of less than one year. Intermediate-term bonds normally mature in two to ten years. Long-term bonds normally run more than 10 years.

Bonds are generally described as less risky investments than stocks, since, if you buy a bond when it is issued and hold it until it matures, you normally get regular income and your investment capital back. The risk you take—in addition to the possibility that rising inflation will undercut the buying power of the interest income you earn—is that the issuer may not be able to meet its obligation to pay the interest and repay the loan. This is known as credit risk. However, since bonds are rated by independent rating companies, you can buy highly rated bonds that pose virtually no danger of default.
But bonds constantly fluctuate in value, so that if you need to liquidate your bond investment during its term, you might have to sell for less than you paid. That is known as market risk.

Bonds are generally considered a smart way to diversify an investment portfolio, since in most years they perform differently from stocks and in some periods when stocks are depressed, bonds can provide a positive return.

>> Bond Prices

There are two primary reasons why bond prices fluctuate, and why you might not get back the full amount of the principal you paid to buy a bond if you have to sell before the bond matures. The first reason is that people change their expectations about the ability of the bond's issuer—the company, government or agency that borrowed the money—to meet its obligations to pay interest and/or repay the principal. The more worried they are, the less willing they will be to pay for the bond. The increased risk investors take when they buy low-rated bonds also explains why these bonds typically pay a higher rate of interest than bonds that are highly rated. The second reason is changing interest rates. If interest rates go up, the price of existing bonds, including the ones you hold, goes down. But if interest rates go down, the price of existing bonds will go up.

Some examples of bond fluctuations:
Suppose you spent $1,000 for a bond paying 5.75% interest, or $57.50 a year. That interest is fixed for the term of the loan. If the interest rates go up to 6%, investors won't be interested in bonds on which they'll earn less than 6%. But they will be willing to pay less than the face value, or the $1,000 you spent for the bond you own. Specifically, they'll pay enough less—in this case $958.33—so that the $57.50 they receive as interest equals the going rate of 6%. To find the current price of a bond with a fixed interest payment, use the following formula:

Bond Price X Fixed Interest Rate = Annual Interest
In our example: $1,000 X 5.75% = $57.50
Now, if interest rates rise to 6%, the value of the bond which pays annual interest of $57.50 is:
Bond Price X 6.00% = $57.50
Bond Price = $57.50/0.06 = $958.33
If, on the other hand, rates fall, let's say, to 5%, the following will happen
Bond Price X 5.00% = $57.50
Bond Price = $57.50/0.05 = $1,150.00

>> Yield

Whatever price investors pay for a bond—its face value at the time it is issued, a discounted price when interest rates on new bond increase, or a premium price when interest rates drop—the amount that's repaid at maturity is the face value, typically $1,000. For example, whether you pay $958, $1,000 or $1,150 in the bond market, you will get back $1,000 if you own the bond when it comes due. You have to take that situation into account if you are considering buying bonds after they are issued. Specifically what you want to know is the bond's "Yield to Maturity," which factors in the amount of time left in the bond's term as a way to evaluate what you will earn on your investment. "Yield to Maturity" measures the annual rate of return an investor will receive from both the interest to be paid and any appreciation or depreciation expected when the bond matures (is paid off). Those figures are available from your investment advisor and, for certain bonds, available from financial news sources.

Part 2: INVESTMENT STRATEGIES — Suggestions on how to establish goals and plan for how to achieve these goals. Once you realize how much information is available in The Value Line Investment Survey, the next step is figuring out how you can use it. Before you begin to invest in stocks, you need to decide what you want to accomplish. The first and most important step is to define your financial goals and determine when you will need the money to meet these goals. Then you can plan an investment strategy. Once you have determined your financial goals, you can begin to create an investment plan for meeting them.

>> Investment Strategy

An investment strategy is a plan for selecting financial vehicles that can help you meet your goals. It involves identifying both the appropriate types of investments and the most suitable individual investments within each type. Developing and sticking to an investment strategy provides much sounder long-term results than buying stocks or other investments at random, even if individually they may be smart choices with strong performance potential.

>> Investment Styles

For the purposes of this explanation, there are three basic styles of investing: conservative, moderate, and aggressive. In brief, a conservative investor wants to protect principal and earn income; a moderate investor is willing to take a certain amount of risk to achieve some stock price appreciation as well as current income; and an aggressive investor is primarily concerned with high overall returns even though it means taking more risk. Whichever type of investor you are, you can use the information Value Line provides as a tool for finding the investments best suited to your goals and your style.

>> Diversification

Smart investors build diversified portfolios. You create a diversified stock portfolio by buying a variety of stocks in a range of different industries. For most individual investors, a practical approach is to own at least 10 stocks in approximately equal dollar amounts in several diverse industries. Diversification is important because portfolios with several different investments usually produce a more consistent and stable total return than portfolios with just one investment. If you own just one stock and it drops dramatically in value, the value of your investment portfolio also drops sharply. But if you own 10 stocks in different industries, the likelihood is that even if some of them decline in price, others will increase or, at the very least, remain stable. Decades of investment analysis demonstrate the validity of the diversification approach. Although your portfolio might not gain as much as if all your money were invested in one stock whose price escalated quickly, it is unlikely to lose as much either. It is important to remember that it is difficult to predict which individual stock will be a winner. Remember, too, that you ought to think of a diversified stock portfolio as one component of an overall diversified investment strategy which could include bonds, cash, real estate, etc.

>> Risk

All investments involve risk of one kind or another. The general rule of investing is that risk is linked to total return, or what you get back in terms of price appreciation and dividends on your investment. The greater the risk you take, the greater your return should be. The less risk you take, the less return you should expect. You can manage the risk of losing money when you invest in stocks by creating a diversified portfolio of a variety of stocks in a range of different industries. That allows you to balance potential losses in one stock against potential gains in another, since certain stocks and certain industries tend to perform well when others lag and vice versa. You assess risk as part of making investment choices. If you are primarily concerned with preserving your principal, you should build your portfolio around stocks that Value Line ranks 1 or 2 for Safety. The return based on price appreciation that you can expect on those stocks may be lower than the return you could expect from stocks with lower Safety ranks. On the other hand, you can be fairly confident that those stocks will be more price-stable than the broader market during a period of falling prices, even though there is no guarantee that, in a market slide, these stocks won't also decline in value.

>> Stock Valuation

You might hear a stock described as overvalued or undervalued. That's generally a comment on how much investors are currently paying for the stock in relation to the valuations of other stocks. An overvalued stock is often one whose P/E ratio is high relative to the rate at which a company's earnings are likely to grow. In some cases, the future performance of these stocks may not be able to sustain the high expectations implicit in the price investors are paying. However, overvalued stocks often get positive press coverage, which builds enthusiasm for the stock and elevates the price even more, at least for a time. In a downturn, the price typically falls until the stock's P/E is more in line with the median P/E of the approximately 1,700 stocks in the Value Line universe. In contrast, an undervalued stock is selling at a P/E that is modest relative to other stocks in the Value Line universe, investors can reap the benefit of strong future performance. Assuming that enough investor attention shifts to a stock’s merits and demand for the stock increases, so too will the price.

>> Book Valuation

Book value is the amount that would be left for common shareholders if all the tangible and intangible assets of a company could be liquidated and all the long and short-term debt, taxes, and preferred shareholders were paid. Tangible assets include the physical plant, inventories and money the company is owed, while intangible assets are the value of patents or brand names (often known as "goodwill"). Value Line calculates the book value per share for every company, and also indicates in a footnote how much of a company's book value is based on intangibles. Conservative investors may want to deduct these amounts when they are analyzing the financial strength of a company.

>> Dividends

Dividends are the part of its annual profits that a company pays to its stockholders as income. That percentage is called the stock's payout ratio. Well-established companies are more likely to pay higher dividends than smaller or growth-oriented companies that often prefer to use their profits to fund additional expansion. A per share dividend as a percentage of a stock's current price is the "yield" to the investor. Investors seeking income will typically look for stocks with above average dividend yields. One consequence of earning dividends is that they are taxable, whereas price appreciation of a stock is not taxed until the stock is sold.

Part 3: BUILDING A PORTFOLIO — Value Line’s Model Portfolios and suggestions on how to design a portfolio.

There are many things to look at when you are evaluating an equity investment. For example, you must try to assess the company's long-term prospects, taking into account factors such as competition, emerging technologies, raw material costs, labor costs, and financial strength. Finding all that information on your own and knowing how to evaluate it can be a daunting task. Professional securities analysts go to great lengths to read annual and quarterly reports, 10-Ks and 10-Qs filed with the SEC, the financial press, trade publications, and more. They also talk to competitors, visit plants and retail sites, and interview management. You probably don't have the time for in-depth research. And since you want to build a diversified portfolio, you would have to be studying several companies at the same time. To simplify that process, Value Line has developed an investment strategy you can use to help you meet your investment goals. It's a way to help you quickly identify stocks that are likely to perform best, based on the company's Timeliness^TM Ranking System. Timeliness ranks for individual stocks and industries are published each week in The Value Line Investment Survey.

>> The Value Line Investment Survey

The Value Line Investment Survey is a three-part publication available to subscribers in print and online. Value Line University introduces you to the information The Value Line Investment Survey provides and the ways you, as an investor, can benefit from it.
Part 1—Summary & Index— is a weekly guide to the contents of The Value Line Investment Survey. It lists the page numbers for all the companies analyzed and whether the stocks have moved up or down in Timeliness over the last week. It also lists the industries that are covered as well as industry ranks. It also provides a capsule summary of essential statistics for each stock in The Value Line Investment Survey, and other current information.
Part 2—Selection & Opinion— presents Value Line's latest economic and stock market commentary, plus analysts' advice on current investment strategies, one or more interesting stock selections, and a variety of timely economic and stock market statistics. It also includes four model stock portfolios-each designed to meet a different investment objective.
Part 3—Ratings & Reports— is the core of The Value Line Investment Survey. It provides regularly updated information and analysis on each of approximately 1,700 stocks in more than 95 different industries. The Survey reports on stocks and industries in a distinctive one-page format. Information on each page is updated every 13 weeks.

>> Selection & Opinion

To help you make the most of the information it provides, every week Value Line reviews the current business environment and analyzes the economic and interest rate trends that affect the stock market in the "Economic and Stock Market Commentary" on the front page of Selection & Opinion. Value Line also updates the allocation of equities and cash reserves it's recommending. The rest of Selection & Opinion presents additional investment analysis, including some general background information and some that you can use in building and managing your own portfolio. Some of the features are weekly while others appear on a quarterly, semi-annual or annual schedule. "Market Monitor," for example, tracks changes in the major equity indexes, trading volume, key interest rates and related information, while the "Quarterly Economic Review" presents a detailed analysis of recent economic developments and a detailed economic forecast. The "Stock Highlight" focuses on one of the stocks favorably ranked for Timeliness in The Value Line Investment Survey. The Stock Highlight provides a more detailed examination than is possible in the analyst's report that appears on that stock's Value Line page.

>> Value Line's Model Portfolios

To illustrate how an investment strategy can meet different goals, Value Line analysts select and maintain four model portfolios, each with a distinctive investment objective. All four portfolios hold 20 stocks. These portfolios, which are closely monitored and regularly updated, are featured each week in Selection & Opinion along with a brief commentary on changes in the lists or a discussion of one of the companies currently held. To be considered for Portfolio 1, modeled for the more aggressive investor wanting to emphasize price appreciation rather than income, a stock must have a Timeliness rank of 1 or 2 and the company must possess a Financial Strength grade of at least B+ at the time of purchase. Although the analyst managing the portfolio can sell a holding at any time, either to buy a stock that seems to have a greater potential or to realign the portfolio diversification, any stock whose Timeliness rank falls to 3 or lower is automatically dropped.

Here are some other characteristics of Portfolio 1:

The companies have generally had above average earnings records.
The companies often have relatively smaller market capitalizations.
Few of these stocks pay a meaningful dividend and most pay no dividends at all.

A number of the stocks in the portfolio have Betas considerably higher than 1, which indicates that they are more volatile than the market as a whole. (Betas are showing on the Value Line company reports in the upper left corner.) Portfolio 2, for the moderate investor, includes stocks that will provide above-average income and whose prices have the potential to increase. Typically, more conservative investors will be most comfortable with a portfolio such as this one.

To be included in the portfolio, a stock must pay a large enough dividend so that its yield ranks in the top half of all stocks tracked in The Value Line Investment Survey. It must also have a Timeliness rank of at least 3 at the time of selection and a Safety rank of 3 or higher. If the Timeliness or Safety rank drops below 3, the stock is automatically dropped from the portfolio.

Here are some distinguishing features of Portfolio 2:

The stocks in this portfolio are commonly ranked 3 (Average) for Timeliness rather than the 1 or 2 typical of Portfolio 1.
The portfolio includes some value stocks, which are equities that typically trade at lower P/E ratios than the other stocks tracked in The Value Line Investment Survey
With few exceptions, the Betas of the stocks in Portfolio 2 are below—sometimes well below—those in Portfolio 1, which indicates that the stocks generally change in price more slowly than the market in general.

Portfolio 3 emphasizes stocks with the potential for large 3- to 5-year price increases. It is most appropriate for investors focused on long-term capital gains. Stocks in this portfolio are those the analysts believe have well-defined growth potential and have Timeliness and Safety rankings of at least 3 at the time they are added to this portfolio.

In addition, you can observe that:

This portfolio is more varied than the others in almost every area. The range of prices is the greatest as is the variation in P/E’s. There is also a greater mix of stocks paying above-average dividends and those paying no dividends.
The portfolio at times includes stocks with no Timeliness rank because of recent restructurings or pending acquisitions.

Portfolio 4 should interest those investors focused on income. It focuses on stocks with above-average dividend yields. In fact, for inclusion, an equity must have a yield that is, at minimum, one percentage point above the median of all dividend-paying stocks tracked in The Value Line Investment Survey, a Timeliness rank of at least 3, and a Financial Strength grade of B+ or higher at the time of purchase.

In addition, you can observe that:

The stocks within the portfolio are typically selected from a broad range of industries, which provides a meaningful degree of diversification.
The portfolio’s risk profile will likely be less than the broader market, given the usual concentration of low-Beta stocks.
The investment performance of all four portfolios is published quarterly in the Selection & Opinion.

You can use the Value Line portfolio that seems to be most aimed at achieving your own objectives. Or you can select individual stocks from the Value Line Ranking System to add to your holdings. It is important to remember that if you are picking and choosing among stocks in the different lists, you always maintain a diversified portfolio. So, as you buy new stocks, choose them with an eye to how they will complement those you already own. We recommend that you own at least 10 stocks in several different and diverse industries and pick from stocks ranked 1 and 2 for Timeliness in the highest ranked industries. You should also try to have stocks with Safety and Technical ranks of 3 or better. The Value Line approach to building a strong and diversified portfolio that is likely to outperform the market is to select timely stocks in timely industries—that means stocks ranked 1 or 2 for Timeliness in relation to the universe of stocks that Value Line tracks and industries ranked in the top third of all those followed by Value Line. A good way to start is to turn to the section called Timely Stocks in Timely Industries, usually found on page 25 of the Summary & Index. In addition, you should use a range of other information provided on the Value Line page to help you select from among the stocks ranked 1 and 2 in their specific industries, concentrating on those industries in the top third of the Timeliness ranks. Another approach is to use the many stock screens (stocks listed according to various criteria) in the second half of the Summary & Index to search for interesting candidates for your portfolio.

MAINTAINING YOUR PORTFOLIO:

>> By Industry – Timeliness

Value Line ranks industries in order of their Timeliness (relative price performance in the next 12 months). Read the latest Value Line reports on the top-ranked industries. Select at least six industries rated highest for Timeliness.

>> By Stock – Timeliness

Value Line ranks approximately 1,700 stocks in five categories according to their Timeliness. The top 100 stocks are ranked 1 (Highest) for expected relative performance over the next 12 months; 300 are ranked 2 (Above Average); about 900 are ranked 3 (Average); 300, 4 (Below Average); and 100, 5 (lowest). Make up a list of those stocks included in your six or more most timely industries that are also ranked 1 (Highest) or 2 (Above Average) for relative price performance in the next 12 months. When and if a stock in your portfolio is found to be no longer a timely investment – that is to say, it has fallen to a rank 4 or 5 for Timeliness – make that stock a candidate for sale

>> By Stock – Safety

Value Line also ranks approximately 1,700 stocks according to their Safety in five categories with 1 (Highest) expected to be least volatile and financially most strong, and 5 (Lowest) most volatile and least strong financially. Eliminate from your list of Timely Stocks in Timely Industries those that fall short of your Safety standard. These Safety ranks are significant and should not be ignored.

>> By Stock – Technical

Value Line also ranks approximately 1,700 stocks according to their expected price performance relative to the overall market in the next three to six months, based on complex analysis of the stock's relative during the prior 52 weeks. Unlike the Timeliness Rank, earnings are not a factor in the Technical Rank. Particularly if you are a short term investor, you should look at the Technical Ranks and try to limit purchases to stocks with Technical ranks of 1 or 2. Under no circumstances, however, should the Technical Rank replace the Timeliness Rank, which has a superior record over the years.

>> By Stock – Income

Value Line estimates the next 12 months dividend yield of each stock at its most recent price. The expected yield is updated in the weekly Summary & Index. Value Line also shows the median yield of all dividend-paying stocks for comparative purposes. Eliminate from your list of Timely Stocks in Timely Industries those that fall short of your current-income standard. For example, if your yield standard is 3%, you may want to eliminate stocks that yield less than 3%. When a stock is sold, replace it with another stock ranked 1 or 2 for Timeliness that also meets your standards for Safety and current income. It would be best in the long run to maintain diversification through six or more stocks in at least six different industries.

>> Value Line Reports

Value Line reports on each stock and each industry once every three months, on a preset schedule, in the Ratings & Reports section. The page numbers on which reports appear are shown in the weekly Summary & Index. When new information requires, a "Supplementary Report" is issued as often as weekly in the final pages of the Ratings & Reports section and online on the day it is written. Read the latest Value Line reports on the industry groups and stocks that have qualified according to all of your standards. Make your final selection of 10 or more stocks from the list that has been refined through the above procedures. Read these report pages regularly to ensure that the stocks you own or are interested in meet your criteria.

Selection & Opinion
Value Line's Selection & Opinion section provides a current appraisal of the economy and the stock market. It recommends how much of one's capital should be invested in common stocks and how much should be set aside temporarily in cash reserves. Read Value Line's Selection & Opinion each week. Also, go to the Value Line web site for our latest Daily Commentary. When the Value Line service in its Selection & Opinion section recommends building cash reserves because the general market seems temporarily to be too high, sell stocks and invest instead in short-term government bonds or other safe instruments. In selling, dispose of stocks ranked 5, 4 or 3 for Timeliness, in that order.

>> Managing A Portfolio

Once you have begun to buy stocks, you'll need to monitor your portfolio. Here's the Value Line approach:

Set up a portfolio to monitor the stocks you own or those you are considering. You can do this on the Value Line Web site.
Check the prices of your stocks on www.valueline.com and look for news relating to your holdings.
Check your portfolio on the Value Line Web site regularly-perhaps once a day or once every other day-to look for news developments affecting your stocks.
Keep up to date with the full and supplementary reports Value Line issues on your stocks, as well as any changes in their Timeliness, Safety or Technical ranks.
Take appropriate action, including selling stocks that have dropped in rank or seem likely to come under selling pressure.

>> Updating A Portfolio

Choosing appropriate stocks is only the first phase of successful investing. You also have to keep track of how your investments are performing and make decisions about when to replace your holdings. Typically, changing conditions in the economy as a whole or in the stock market are signals to update your portfolio. Successful investors keep regular track of their portfolios and adjust them when appropriate to keep their investment strategies on track, even when the stock market in general is performing in a fairly consistent way. The information in The Value Line's Investment Survey that you use to identify stocks to buy initially is the same information that can help to track and update your portfolio. For example, if you select a stock because it is ranked 1 or 2 for Timeliness, but during the period you own it the rank is downgraded to a 4, that is a stock you would normally replace if you were using the Value Line investment strategy. Statistical evidence supports that approach. In fact, investors who consistently sell a stock when it falls to a rank 3, rather than waiting until it drops to rank 4 or 5, have had a higher overall portfolio return although they have also paid higher brokerage fees because they have been trading more frequently. While Value Line updates its performance data and the Timeliness and Technical ranks every week, you will probably find that updating your individual portfolio somewhat less frequently is also a reliable approach.

Part 4: STUDYING A STOCK — How to buy or sell stocks that are most likely to meet the goals an investor has set.

>> How To Use The Value Line Investment Survey Page

To start studying a stock, we suggest that you concentrate on the major features found on every company page of Ratings & Reports. These are:

The Value Line Ranks: Timeliness, Safety, Technical;
The Analyst's Commentary;
Financial Estimates;
Historical Financial Data;
Annual Rates (of Change);
Target Price Range;
Projections (of 3- to 5-year stock prices);
Price/Earnings Ratios.
Timeliness Rank

One way Value Line ranks stocks is by their expected price performance relative to all other of the approximately 1,700 stocks Value Line follows, over the coming six to 12 months. The Timeliness rank identifies those stocks followed in The Value Line Investment Survey which are likely to have the best relative performance. All of the approximately 1,700 stocks Value Line tracks in The Value Line Investment Survey are ranked in relationship to each other, from 1 (the highest rank) to 5 (the lowest rank). Stocks ranked 1 and 2 are expected to show stronger price performance than the remaining stocks, while those ranked 4 and 5 are likely to underperform or have weaker price performance.
At any given time:
100 stocks are ranked 1
300 stocks are ranked 2
900 stocks are ranked 3
300 stocks are ranked 4
100 stocks are ranked 5

Relative earnings and price growth over the past 10 years is the major factor in determining Timeliness. Companies whose earnings growth over the past 10 years has been greater than the increase in their stocks' prices tend to be ranked 1 or 2. Other factors that influence the Timeliness rankings are stock price momentum, quarterly earnings performance, and earnings surprises. Stocks ranked 1 and 2 for Timeliness can be more volatile than the market in general, and frequently are stocks of smaller companies.

>> Using Timeliness and Other Factors in Choosing Stocks
The Economy And Value Line's Market Strategy

First, read Value Line's current summary and opinion of the economy, the stock market, and advisable investment strategy entitled "The Value Line Equity View" in Selection & Opinion. Remember that it is not necessary for the ordinary investor, who usually has other business interests, to read everything that is published. The service is so organized that it can also be used as a reference. You can look in the Summary & Index every week to find updated references about stocks that you own or in which you may be interested. The stock ranks also provide you with buy and sell recommendations, which you may act upon. We must caution that a prudent investor ought to think of stocks as components of a portfolio, rather than as single entities. Diversification reduces the overall risk of stocks within a portfolio. Diversification is an important advantage, long recognized by sophisticated investors, yet often ignored by many who think in terms of single stocks without reference to the portfolio as a whole.

>> Timely Industries

Second, look at industries ranked in order of Timeliness in the screen on page 24 of the weekly Summary & Index. To be sure that your portfolio is diversified, pick from that list at least six industries shown to be most timely -- i.e., those industries ranked one through six.

>> Timely Stocks

Third, look to the 100 stocks ranked 1 (Highest) and the 300 ranked 2 (Above Average) for Timeliness. These ranks for relative performance for the next six to 12 months appear in both Ratings & Reports and in the weekly Summary & Index. (Once a stock ranked 1 or 2 for Timeliness has been bought, it may be held until its rank drops to a 3, 4, or 5.)

>> Timely Stocks Within Timely Industries

Fourth, pick at least six stocks that are in the top-ranked industries. Then, if possible, pick at least four or more stocks -- either those that also have Safety ranks of 1 or 2 and are within the top 12 industries or those that ranked 1 or 2 for Timeliness or Safety, even though the industry isn't top ranked. To narrow the list, follow steps five through seven. Remember that the suggested diversification is ten or more stocks.

>> The Big Picture

Fifth, read the industry comments that precede the stock report to see the big picture of the long-term growth patterns of earnings and values for stocks in the industries you are interested in.

>> Safety Constraints

Sixth, from the stocks selected so far, choose those that also conform to your safety requirements. If you are a conservative investor, or if you think the market is headed lower, give preference to stocks ranked 1 or 2 for Safety. If you are bullish on the market and are willing to buy more volatile, or riskier, stocks, accept those with lower Safety rankings from 3 down to 5. A low safety rank may be acceptable when the market is undervalued. At such a time, riskier stocks are usually depressed. Since they are apt to be more volatile, they are capable of rising faster when confidence in the market is restored.

>> Dividend Requirements

Seventh, select from the remaining choices stocks that meet your current dividend requirements. Dividends for the coming year are shown in the Summary & Index and on Ratings & Reports pages, as well as many screens and articles that appear in Selection & Opinion. Bear in mind that it may be difficult to find a stock that is ideal on all counts. It may be necessary to make certain concessions, accepting a lower dividend yield, depending upon the relative importance of your various goals. For example, conservative investors may at times have to select stocks ranked 3 for either Safety or Timeliness.

>> Timeliness Rankings Change

There are several circumstances that may cause a stock's Timeliness rank to change. This includes:

The release of a company's earnings report. A company that reports earnings which are good relative to those of other companies may have its stock moved up in rank, while a company reporting poor earnings could see its stock's rank drop.
A change in the price of a stock can also cause a stock's rank to change. A change in price carries less weight than a change in earnings, but it is still an important determinant. Generally speaking, strong relative price performance is a plus, while negative relative price performance is a minus (relative to all other approximately 1,700 stocks).
The "Dynamism of the Ranking System." This phrase means that a stock's rank can change even if a company's earnings and stock price remain the same. That's because a fixed number of stocks are always ranked 1, 2, etc. Every time one stock's Timeliness rank moves up or down, another's must also change. As an example, let's suppose one company reports unusually good earnings, causing its stock's Timeliness rank to rise from 2 to 1. Since there can be only 100 stocks ranked 1, some other stock must fall to a rank of 2, even though there has been no change in its earnings or price.

>> Safety Ranks

Value Line also ranks stocks for Safety by analyzing the total risk of a stock compared to the approximately 1,700 stocks in the Value Line universe. Each of the stocks tracked in The Value Line Investment Survey is ranked in relationship to each other, from 1 (the highest rank) to 5 (the lowest rank). Safety is a quality rank, not a performance rank, and stocks ranked 1 and 2 are most suitable for conservative investors; those ranked 4 and 5 will be more volatile. Volatility means prices can move dramatically and often unpredictably, in either direction. The major influences on a stock's Safety rank are the company's financial strength, as measured by balance sheet and financial ratios, and the stability of its price over the past five years.

>> Technical Ranks

Value Line provides a Technical rank for each stock as a predictor of short term (three to six months) price changes. Like the other Value Line ranks, this one is relative, assigning scores to each stock tracked in The Value Line Investment Survey in relation to the others, from 1 (the highest rank) to 5 (the lowest rank). The rank itself is based on a proprietary model which evaluates 10 price trends over the past year.

>> Analysts Commentary

Every Value Line page contains a written commentary, describing the analyst's assessment of how the stock will perform in the future. The text section provides an opportunity for the analyst to:

Evaluate and interpret the data that's available
Explain the factors that he or she thinks are important to the forecast
Provide relevant additional information
The analyst's commentary is especially useful when the sales or earnings numbers don't tell the full story about a stock's performance, or when a new trend is emerging. For example, a stock might have a low Timeliness rank, but the analyst may have reason to believe that earnings will turn around in the near future.
The reverse could be true as well. The analyst might caution investors about earnings surprises, expected management changes or other factors that might make a stock less desirable than its recent history might indicate.
The commentary is the forum for explaining why conditions are likely to change, and giving the reader insight into why these changes will happen.

>> Financial Estimates

A wide range of financial data is presented in the statistical section in the center of each Value Line page. The numbers to the right in bold typeface are estimates made by Value Line's security analysts. These estimates cover a wide variety of items, some of which are:

Sales, Earnings, and Dividends Per Share
Annual Price/Earnings Ratios and Dividend Yields
Total Sales, Net Profit Margins, Long-term Debt and Shareholders' Equity

In most cases, estimates are made for the current year, the next year, and the period out 3 to 5 years.

>> Historical Financial Data

The center section of every Value Line page, known as the statistical array, contains a wide range of historical performance information for a company and its stock. Some of the historical information is reported for as much as 17 years into the past, some for 12 years, and the balance for 10 years, provided in each case that the company has been in operation that long. The data include ratios such as the operating margin, net profit margin, and return on shareholders' equity. This information helps identify trends in the company's performance. The trends are important because they show whether there has been a consistent pattern across a number of different areas, including sales, earnings, operating and profit margins, and return on equity. You can use this data to do your own analysis of a stock's potential and to help determine whether or not you want to add it to your portfolio.

>> Annual Rates of Change

Value Line provides historical data and projects future performance for five key measures of a company's current financial health and estimated growth potential. This capsule summary of important indicators gives you, at a glance, an overview of how a company has been doing and how it is likely to perform in the future. This data, which is usually positive but can also be negative, is expressed as an annual compound rate of change over the past 10 years and the past five years as well as projected rates three to five years into the future. The measures are:

Sales — Gross volume less returns, discounts, and allowances; net sales.
Cash Flow — The total of net income plus non-cash charges (depreciation, amortization, and depletion) minus preferred dividends (if any).
Earnings — A company's total profit before non-recurring gains or losses, but after all other expenses.
Dividends — A payout to shareholders determined by the Board of Directors.
Book Value — Net worth (including intangible assets), less preferred stock at liquidating or redemption value, divided by common shares outstanding.

>> Target Price Range

A Target Price Range appears in the upper right portion of each Value Line report, in the same section as the stock price graph. It shows the range in which Value Line's analyst thinks a stock's price is most likely to trade in the three- to five-year period indicated just above. The Top Horizontal Line indicates the highest level at which the stock is likely to trade in the three-year period. The Bottom Horizontal Line indicates the lowest level at which the stock is likely to trade in the three-year period. The Target Price Range is based on information available to an analyst at the time a new report is written, but could obviously change in the future. The data is the same as that appearing in the PROJECTIONS box to the left of the graph. (see Projections)

>> Projections

The stock price PROJECTIONS box appears in the upper left of every Value Line report, just below the stock ranks. This shows:

The most likely high and low price of a stock in the time period specified.
The percentage gain (or loss) if the high or low prices are reached.
The total compound annual rates of return to shareholders (including dividends) if the forecast prices are attained.
The price projections are derived from the forecasts of earnings per share and price/earnings ratios shown in the far right column of the large statistical section. They are based on the best information available at the time a report is written and, obviously, may change in the future.

>> Price/Earnings Ratio

Earnings per share is the amount of a company's profit or net income after taxes attributable to each of its common shares outstanding. The price of each share is its value based on the last public sale of a share. The ratio between them, or the price divided by the earnings, is the stock's P/E. For example, if ABC Corp's share price was $22.50 and its earnings per share $1.25, the P/E ratio would be 18. If its earnings were $1.50 and its price $22.50, then its P/E would be 15. And if its earnings were $1 and the price $22.50, its P/E would be 22.5. There is no "right" or "wrong" P/E, but there is a current median P/E, or midpoint of the ratios of all the stocks Value Line tracks for The Value Line Investment Survey. The median is shown each week on the front cover of the Summary & Index section. On March 8, 2013, for example, that median was 16.1. That means that roughly half of all stocks in The Value Line Investment Survey had a higher P/E and half had a lower P/E as of that particular date than the median. In general, buyers will pay higher prices and accept a higher P/E to own the stock of a company whose earnings they believe will grow at a faster rate than those of the average company. In fact, one of the fascinating things about investors is that they are often willing to pay high prices for certain "hot" stocks that have low, or even no, earnings on the anticipation that they will be money makers in the future. The reverse is also true.

>> Compute A P/E Ratio

Value Line computes the P/E ratio that appears at the top of the Value Line page (highlighted) using the current price and an earnings figure that typically includes six months of past performance and six months of anticipated earnings based on the analyst's assessment of current data. In contrast, a trailing P/E is a ratio of the current price to the past year's worth of reported data. A trailing P/E, which is the number usually reported in the financial press, can sometimes be misleading if you're considering buying a stock, because it does not give you information about future expectations. A company whose earnings are about to fall might appear to be selling at a modest P/E based on reported data. But if, in fact, the company reports a big drop in earnings in the near future, the price may also drop and any advantage offered by the modest P/E will disappear. That is the type of information a Value Line analyst is alert to, and the information can influence a P/E that includes six months of projections. Value Line also provides the 10-year median P/E that puts the recent P/E in historical perspective. This information shows what investors have been willing to pay for a stock in the past. If the current P/E is higher than that median, it suggests that investors are optimistic that the company's earnings will grow. Remember, though, that general economic conditions and the momentum of the stock market itself also exert a major impact on stock prices and therefore on P/E ratios. If valuations in general are high, a company's current stock price may be higher than it might be in more "normal" times.

>> Using P/E Information

You can use the P/E as a factor to help evaluate whether or not to buy a particular stock at a particular time. If you believe that earnings are going up and that the current price/earnings ratio will be maintained, you might want to buy now, because you may benefit from a future earnings increase. If the earnings estimate is for continued growth but the P/E is already high, you may want to wait for a dip in prices in the market as a whole for an opportunity to buy without paying more than you want to for the stock based on the total return you anticipate.

>> Changing P/Es

Stocks of companies whose earnings grow quickly tend to have higher P/E ratios than stocks of companies whose earnings grow more slowly. Suppose ABC's earnings had been growing at an annual rate of 13% over the past five years, it was selling at a price of $22.50 a share and had a P/E ratio of 18. If the company's earnings are expected to jump from $1.25 this year to $1.50 next year, that would be a 20% growth rate [$0.25 ÷ $1.25 = 20%]. Suppose also that ABC has developed a hot new product and it appears that the new, stronger rate of earnings will persist for several years? In that case, investors will probably be willing to pay more for the stock and be willing to accept a higher P/E ratio than that of the general market. For example, if the price went up to $30 a share based on earnings of $1.50 a share, the P/E would be 20 [$30 ÷ $1.50 = 20]. Price/earnings ratios and stock prices can also go down. If earnings are expected to fall, e.g., to $0.96 a share, investors looking at the reasons for the weakness may conclude that the company's business prospects have dimmed. If that happens, the price may slide, perhaps to $11.50, which produces a P/E of 12 [$11.50 ÷ $0.96 = 12].

>> A Final Word

Value Line University has provided a basic tutorial for those getting started with the important responsibility of building their own investment portfolios. We have introduced you to the tools you need to analyze the fundamentals underlying the Value Line approach to building a portfolio. For more knowledgeable investors, the links to various pages of The Value Line Investment Survey provide more complex and detailed information. All investors, of course, must always bear in mind that the market constantly changes, that with change come surprises, and that there is always risk. Fortunes have been made and lost in the stock market, but over the long term, the stock market has outperformed all other investment options. Nevertheless, risk is always there. And that is why every investor, or potential investor, must carefully determine his or her risk tolerance and set clear investment goals that reflect said tolerance. We hope we have shown you how to do just that at Value Line University.