One of my favorite screens over the years has been one based on Value Line rankings and low price. Buying top-ranked stocks that trade for less than $10 has been fantastic over the years at finding undiscovered growth stocks, turnarounds and longshots that are approaching the launching pad. Picking stocks using this basic approach has consistently beaten the broader markets.
Although you need to learn to love volatility for it to work, it beats the broad market by about a 2-to-1 margin over the last 25 years and by a factor of 4 since 2000. The success is not because of form-loaded returns, as it has crushed the market over the last three- and five-year periods as well.
While the list right now is certainly interesting, there is something else about the screen results that really stand out. I have been running this screen on a semi-regular basis since about 2000. In a really bad market, like 2002-03 and 2008-09, there might be 40 or so companies on the list. As markets get toppy, like in 2007, the numbers will often fall into the low teens. I have seen it below 10 a few times, but I have never seen it at the current level of four stocks. In the entire 1,700-plus stock universe covered by the Value Line Investment Survey, only four have a high timeliness ranking and trade in single digits.
I believe that is the lowest number of qualifying stocks in the past 15 years. Together with the fact that the Value Line Median Appreciation Index is reading 35, well below the 55 where academic studies have suggested is a good place to sell stocks historically, this contains some information about current market valuations. It may not be a precise timing indicator and the Appreciation Index has hovered around these levels for over a year, but it is certainly a warning light.
Of the four stocks that make the grade, A.H. Belo (AHC) is easily my favorite. The company is in the newspaper business, which will always be close to my heart as I am doing my best to single-handedly keep the industry alive by reading two or three actual ink-on-your-fingers newspapers a day. Belo owns The Dallas Morning News and The Denton Record-Chronicle and operates related websites. It also publishes the Briefing newspaper and Al Dia, a Spanish-language newspaper. It has diversified into marketing and commercial printing in the past few years, which is helping the bottom line. It also sold several businesses and used the proceeds to pay out some hefty special dividends in the past year. The regular dividend equals a 5.5% yield, so you get paid to wait for the business to improve and drive the stock price higher.
Rite Aid (RAD) has been on the list for as long as I can recall. The stock has rewarded investors, as the shares were around $2 the first time I recall seeing it on the high-rank cheap stock list back around 2007, but I am not real excited about the stock at this level. The company is still heavily indebted and the pharmacy business is incredibly competitive, with one chain drugstore on every corner in the U.S. that isn't occupied by a bank or fast-food joint. It may still be on the screen, but I do not think I would buy it here.
Vonage (VG) is on the short list of stocks as well. The company is in the voice-over-Internet telephone business, which is also a very crowded and competitive field. My biggest problem is that I have never talked to anyone who signed up and was happy with the service. While we are all pre-programmed to some degree to hate our phone provider, not one single person I have met who used it has had a good word to say about the company, and that is disturbing and keeps me form wanting to own the stock. I can't make a quantitative value case for the stock, as it trades at 11x book value and has an EV/EBIT ratio of 19. It is not a growth story, as book value growth is flat and revenues have been declining over the past five years. I will pass on this one as well.
The final stocks is China Automotive Systems (CAAS). While the story is compelling and the numbers make sense, I have a special dislike for Chinese stocks, so I will let you do your own research on this one. If you are more comfortable than I am with Chinese stocks, this could be a bargain stock with high growth potential worth investigating.
The high-rank, low-price screen is producing a very small number of prospects and most of them are failing the Tim test. I like Belo, especially for growth and income investors, but will pass on the rest of the list.
