A Reality Check From Value Line

 | Sep 20, 2012 | 3:00 PM EDT
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This week, I have been focusing on some of the ways I use Value Line to uncover solid stock ideas. I have often said that this is the one indispensable service that I would retain if I could only have one.

Other noted value types such as Walter Schloss and Warren Buffett have discussed how valuable Value Line's statistical data can be for investors. I spend a good part of every Friday going through the new issue online, looking for ideas and information that might help me make money for investors, and of course for myself.

I always make it a point to check the quarterly winners and loser section of the weekly issue. I confess that I like "atta boys" as much as anybody, and this week's issue contains a few. Sprint Nextel (S) has more than doubled since I suggested it as a long shot with CEO buying. Kimball International (KBALB) has seen a dramatic turnaround in its business lines and has doubled since I last suggested the stock in May. Longshot pick Cincinnati Bell (CBB) had an impressive quarter, surging by more than 50%. I have to admit that it is nice to see stocks that I have suggested to readers appear on the list of top performers.

But the real value of the top-performers list comes from the trends and market information. I notice that several of the homebuilders are on the list. I liked the group as a trade at the end of last year, but it looks to me like the stock prices are now fully discounting what I believe is a limited housing recovery. My research confirms Roger Arnold's theory on shadow inventory, and I believe we will see excess supply before the end of this year into next year in many markets. If you came into the year on the long side, these stocks have done extraordinarily well, but it is probably time to take some profits in the sector.

When you turn to the list of the biggest losers, you always hope to not see your stock picks on the list. Unfortunately I often do, as many deep-value stocks can take a long time to turn around. This week is no exception, as my two stinkers this year, RadioShack (RSH) and SuperValu (SVU), are on Value Line's stinkers list. These two companies are in incredibly challenging industries, and business conditions and the stock prices continue to just get worse.

I have seen enough stocks such as Atlas Pipeline Partners (APL) and Conn's (CONN) go from big losers to huge winners over time, so I continue to hold these two stocks. For now, I do not have a lot of confidence in near-term improvement, so I am not going to scale into the stocks in spite of the decline.

The losers list also shows an important trend. Almost all of the for-profit educational stocks are on the list. I have been bearish on the group for some time and remain so. Even though the stocks have collapsed, I believe they have further to fall. Increased regulatory oversight, rising loan defaults and declining enrollments will continue to cause fundamental deterioration in the sector. I see no reason to buy the group or lift any short positions. I am not a great short-seller by any means, but this has been the single best short-side call of my entire career.

The biggest loser in the last quarter is also so the most intriguing stock. Knight Capital (KCG) saw its stock fall by more than 75% after a trading software problem caused it to suffer a loss of more than $400 million. For a period of time it looked like the company may have to liquidate and disappear from the trading landscape. However, a rescue deal led by the brokerage firm Jefferies Group (JEF) injected $400 million into the company, and it appears to be on track for a solid recovery.

Although investors and traders had originally backed away from Knight, trading volumes are now back to almost the same level as before the fat fingers hit and the stock crashed. The shares now trade for less than 70% of tangible book value and are worth investigation as a long shot. Given the capital injection and the strong hands of Jefferies, Blackstone (BX) and others, Knight should survive and prosper. A takeover at some point by one of the investors in the recapitalization would not be much of a surprise.

Studying winners and losers in the market in each week's edition of Value Line can be a valuable and informative exercise for stock-pickers and market watchers alike.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
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