Value Line Low Total Return Screen (1/4/2013)

Why do we pay attention to the Value Line weekly updates? Because a number of highly successful long-term investors cite Value Line as one of their favorite trusted resources.

“I don’t know of any other system that’s as good… The snapshot it presents is an enormously efficient way for us to garner information about various businesses… I have yet to see a better way, including fooling around on the internet, that gives me the information as quickly.” — Warren Buffett, Berkshire Hathaway, 1998 Annual Meeting speaking about The Value Line Investment Survey.

“[Value Line is]…the next best thing to having your own private securities analyst.”
—Peter Lynch, One Up On Wall Street

In our case, we’ve found the low total return forecasts for all companies to be among the most compelling opinions/forecasts while we either (1) search for opportunities or (2) practice effective stewardship when it comes to staying vigilant about our current holdings.

And in this case — this week — we find an outsized number of opportunities as the average Value Line low total return forecast (11.5% as shown in the accompanying figure) for the companies in Issue 7.

Materially Stronger: SanDisk (SNDK)

Materially Weaker: Western Digital (WDC), Questcor Pharma (QCOR), Skullcandy (SKUL), Benchmark Electronics (BHE), Pitney Bowes (PBI), International Rectifier (IRF), Advanced Micro Devices (AMD), Intersil (ISIL), PMC-Sierra (PMCS)

With the median low total return forecast (for all 1700 stocks) at 8.7%, we’ve found that shopping in the range where the return forecasts are 5-10 percentage points better than the market average. In this case, we’d be drawn to Intel (INTC), Logitech (LOGI) and Cree Research (CREE) as they’re closer to the “heart” of the “sweet spot.”

This graphic provides a quick check (second and third opinions) versus the Value Line forecast for the featured companies. The second and third opinions are from Standard & Poor’s (S&P) and Morningstar. A comparison is made versus the fair value (FV) opinion expressed by both of these research services. In the case of Staples (SPLS), the elevated low total return forecast aligns pretty well with the Value Line opinion — but the Morningstar analysis doesn’t even think Staples is undervalued at these levels with a Fair Value Ratio (FVR) greater than 0%. (For Fair Value Ratios, negative figures suggest stocks that are potentially undervalued or “on sale.”)

Our experience is that the S&P opinions are more reliable when it comes to non-core stocks and/or special situations. The Morningstar analysis seems to correlate more closely with our methods when it comes to core stocks.

In the case of Staples (SPLS), we’d lean towards the S&P judgment and agree with Hugh McManus. Hugh presented Staples as his featured stock for the December 2012 Round Table — fully noting and disclosing that challenges lie ahead. We’ll take a closer look at Staples (SPLS) with a full analysis as well as Intel (INTC) as it appears relatively well-positioned here.

Note the different opinions from S&P and Morningstar on Apple (AAPL). As noted, for special situations — we’d place more credence on S&P in these situations, and see Apple (AAPL) as less undervalued than most people think it is.

Happy New Year, to stock hunters everywhere!  May the new year find good hunting and exceptional returns.

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