What does a comprehensive analysis of 1,700 widely followed stocks tell us about the general level of the market?


By: greenbackd

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Value Line’s Median Appreciation Potential (VLMAP) 2009


Marketwatch’s Mark Hulbert has a great article Finding the best four-year market forecaster examining Value Line’s Median Appreciation Potential (VLMAP), which is the median three-to-five year gain that Value Line’s analysts estimate for the 1,700 stocks they cover.

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From Value Line October 2010 update:

The estimate of the median price appreciation potential is found by first calculating the percentage change between the current price of each stock in our universe and the middle of its 3- to 5-year Target Price Range. These figures are then arrayed, and the median price appreciation potential is determined. We select the median of the array (the middle) as the most likely price, in order to play down the effect of outliers, that is, excessively large or small percentage price changes.

The chart [above] included below depicts the results of those projections from 1983 to 2009, using the Value Line Arithmetic Index as our measure of the market. The actual price is taken as the average of the middle year of the 3- to 5-year forecast, so that a projection made at the end of 1983 would be compared to the average price of the index in 1987. Accordingly, we are comparing actual results to a 3 ½ year forecast.

Those who follow the VLMAP often adjust it downward when translating it into a forecast because Value Line’s analysts — like most of Wall Street (see my post on forward earnings) — are on average too optimistic. Note that the 2009 projection has turned out to be roughly right:

Our estimate for the year 2009 (made at the end of 2005) was 2683. The average price of the Value Line Arithmetic Index in 2009 was 1758. The large deviation arises from the effects of the recession that followed in the wake of the financial turmoil in late 2008 and early 2009. Meanwhile, the average deviation between the projected and actual average prices during this period was 18% (ignoring signs). The median deviation during this period was 11%. The projection for 2013 now stands at 3500. The 4-year projected price of 3500 now stands at 40% above the current level—suggesting respectable returns for patient investors.

The market closed Friday at 3,444. Why does this model work so well?

Mark Robertson, founder and managing partner of the Detroit-based advisory service Manifest Investing, also uses a version of the VLMAP. He thinks one answer lies in the willingness of Value Line’s analysts to focus on a longer-term horizon than is typical for most Wall Street analysts.

It may seem “counterintuitive,” he acknowledges, but “long-term forecasting is actually easier and more accurate than the quarterly whispering and chasing that we see from and on Wall Street.”

Because they are focusing on where the stocks they follow will be trading in three- to five-years’ time, Value Line’s analysts are less likely to get swept away by whatever mood has captured Wall Street’s attention, Robertson says.

Compared with analysts who focus on just the next couple of quarters, for example, Value Line’s are less likely to adjust their price targets based on the latest earnings. This makes them less inclined to get more bullish as the market goes higher — a tendency that leads to being excessively bullish at market tops.

Over the past five years the VLMAP has been as low as 45 percent and as high as 185 percent. It currently stands at 50 percent, which is close to the five-year low and only slightly higher than the 35 percent estimate logged in the weeks leading up to the bull-market high in October 2007.

Read Finding the best four-year market forecaster.

Order Quantitative Value from Wiley Finance, Amazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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My name is Tobias Carlisle. I am the founder and managing member of Eyquem Investment Management LLC, and portfolio manager of Eyquem Fund LP. Eyquem Fund LP pursues a deep value, contrarian, Grahamite investment strategy based on the research featured in Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (hardcover, 288 pages, Wiley Finance, December 26, 2012), and discussed on Greenbackd. I have extensive experience in activist investment, company valuation, public company corporate governance, and mergers and acquisitions law. Prior to founding Eyquem, I was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions I have advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam, ranging in value from $50 million to $2.5 billion. I am a graduate of the University of Queensland in Australia with degrees in law and business (management). Contact me I can be contacted at greenbackd [at] gmail [dot] com. I welcome all feedback. Connect on LinkedIn, where we’re Friends.
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