Newsletter Dec 27, 2001
Updates:
Not too many updates this time. Buhler Industries and Cognos are both updated. Both are good companies but I am waiting for lower prices before investing in these two.
1 new Strong Buy Research report is offered for sale for $10.00. This is a unique company in the Financial Services industry. I selected this company by searching for companies with high returns but low price/ earnings ratios and in good industries. I rate this company a Strong Buy. Click here for more information. See Performance to review performance of previous Strong Buy picks.
SUGGEST A COMPANY
Is there a company that you would to see added to this Site? I’m looking for highly profitable, easy to understand companies that are trading at reasonable P/E levels. Small companies as well as large ones are of interest. I’m still more interested in Canadian companies. (Many members also like early stage companies that are currently losing money but which have enormous potential. Unfortunately my fundamental analysis methods really don’t work on those companies, so please suggest companies that are profitable).
My analysis takes me 3 to 6 hours of effort per new company. It also takes me time to obtain the financial reports. For this reason I am increasingly selective in which companies I will look at. If you suggest a company and I end up rating it a Strong Buy, then I will offer it as a research report for sale for $10.00. Due to the effort involved in my analysis I will no longer be adding new Strong Buys to the free area of my Site. (I may add the new ones to the free section after 6 to 12 months, particularly if it has appreciated in price to the point where it is no longer a Strong Buy).
So, send along your suggestions…
High Quality Research Available from Value Line
I recently came across some performance data for Value Line research, which seemed quite impressive. Since I am also now in the business of selling research I hesitated (for about 5 seconds) as to whether or not I should tell you about this (competitor) research. I quickly decided that I would let you know about this because the key feature of my site is honesty and trust. The purpose of my Site is to help investors succeed. If I find a better method than my own I will tell you about it. I figure that if I operate my Site in that kind of honest manner then I will get my share of business as well.
Value Line provides independent research on 1700 companies. They offer a one page format that presents key data and a company rating in a very concise format. They rate each company on a scale of 1 to 5 in terms of “Timeliness” in regards to performance in the next 6 to 12 months. The formulas ranking the stocks is not revealed but is a mechanical process. Inputs are the 10 year trend of relative earnings and prices, recent earnings and earnings surprises.
This simple and mechanical rating system has been extraordinarily effective. Their number 1 picks (as a group) have consistently outperformed their number 2 picks, which have beat their number 3 picks, which beat the number 4 picks which beat the number 6 picks. The following table shows the performance of a strategy of investing in each group of stocks at the start of each year since 1965 and then re-investing in the new number 1s (or number 2s as the case may be) each year. (Excludes Trading Charges and Ignores Dividends)
| 1965 – 2000 | 1965 – 2000 | |
| Total Gain | Compounded Annual Gain | |
| Group 1 | 15,915% | 15.14% |
| Group 2 | 7,430% | 12.75% |
| Group 3 | 2,743% | 9.74% |
| Group 4 | 959% | 6.77% |
| Group 5 | 193% | 3.03% |
| Dow Jones | 1083% | 7.10% |
This is before Trading charges and before Dividends, Taking those into account, the extent to which Group 1 beat the Dow would be very much smaller since the Dow had a compounded annual average growth of 11.24% over that period, including dividend return. Even allowing 1% or so for Trading Fees, Group 1 easily beat the Dow and Group 2 narrowly beat the DOW. It is definitely clear that they were able to predict which stocks would out-perform in the 6 to 12 month period.
By any standard, this is an excellent record. Their top picks have far outperformed their lower picks and worse picks. It’s very interesting that Group 1 outperformed Group 2 by over 16 times and yet it did this with a compounded annual return that was only 2.24 times better. Group 1 grew twice as large as Group 2 but did this by outperforming by “only” 2.5% per year. This illustrates that in the long term, every percentage points in annual return counts dearly, there is no such think as giving up a small amount of return.
Not only has Value Line outperformed as a stock picking method since 1965, but they provide a graph which illustrates that it has also outperformed over much shorter periods of time such as over 5 year periods of time.
Value Line Research costs U.S. $598 per year. It’s not cheap but given the performance it is worth considering for the serious stock picker with a portfolio of say $100,000 or more. Also it may be available in libraries.
Value Line Research Versus my investment-picks.com research
Value Line’s success proves that you can beat the market over the long term
Value Line tracks its performance honestly as do I. The great majority of advisory services that I have seen do not track their performance at all or else do it in a rather dishonest way (ignore the bad picks, talk about subsequent high and ignore the recent price etc.)
Value Line focuses on earnings and revenue growth per share rather than absolute, I do the same.
Value Line analyses the company in a concise way based on key ratios and figures, as do I.
Value Line’s timeliness rating looks at price momentum. A recent rise in share price is a positive indicator. In contrast, I studiously ignore share price trends and focus on the value of the company compared to it’s current price. It appears that my method is quite different from their short term Timeliness indicator but is perhaps more similar to their long term share price prediction.
Value Line Research is available as a relatively expensive package while my latest Strong Buy picks are priced at only $10.00 each and much of my work is available free.
I cover smaller Canadian companies that Value Line does not cover.
In summary, it appears that Value Line has an excellent Product. My product is different and is a strictly fundamentals based approach (I ignore stock price trends, as does Warren Buffett). You may wish to use both services.
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Regards and thanks for your interest,
Shawn Allen
Editor
investment-picks.com