220 East 42nd Street
New York, New York 10017
Telephone: (212) 907-1500
Toll Free: (800) 634-3583
Fax: (212) 818-9748
Web site: http://www.valueline.com
Incorporated: 1931 as Arnold Bernhard & Company
Sales: $84.7 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: VALU
NAIC: 523920 Portfolio Management; 511110 Newspaper Publishers; 511120 Periodical Publishers; 511140 Database and Directory Publishers; 511210 Software Publishers; 541810 Advertising Agencies
Value Line, Inc. is best known for publishing the Value Line Investment Survey , the most widely used independent investment service in the world. The company publishes more than a dozen print and electronic products, read by more than half a million people. The company's flagship weekly periodical, which provides comprehensive information on approximately 1,700 stocks, more than 90 industries, the stock market, and the economy, earned the moniker the bible of Wall Street. Long known for its strong and consistent record, the seven-decadeold information service was widely regarded by many as the world's best-performing financial newsletter. The Investment Survey had been perennially ranked number one by the Hulbert Financial Digest. Other publications bearing the venerable company name include the Value Line Mutual Fund Survey , which ranks and evaluates mutual funds. The company's Value Line Family of Mutual Funds, consisting of 15 investment companies, which manages investments for private and institutional clients, has generally failed to match the success of its information segment.
Value Line was founded in 1931 by legendary financier Arnold Bernhard. Following a brief stint as a reporter and playwright, the would be "Dean of Wall Street" made his entry into the business world as a trainee in the Railroad Department of Moody's Investment Service during the late 1920s. The neophyte investor, like the rest of the Wall Street community, was ill prepared for the disastrous events to come. The Great Crash of 1929 and the ensuing collapse in the early 1930s, however, proved to be the catalyst for his entrepreneurial drive.
Having realized that not even Moody's, one of the most respected sources of financial opinion in the world, had been able to predict the impending collapse of stock values to come, Bernhard concluded that what his investors needed was a standard of normal value that would signal when stocks were overvalued and when they were undervalued. Instead of accepting the conventional wisdom of the time, that the value of a stock is revealed completely in its market price, he began examining the correlation between the monthly price of stocks and such factors as annual earnings and book values over 20-year periods.
Bernhard's new ideas, along with the continued decline in the market in the early 1930s, did not sit well with one of his clients who suffered heavy losses during the period and eventually brought suit against Moody's for allowing Bernhard to manage his account. In 1931, the young investment counselor was fired. The apparent catastrophe, though, proved to be a blessing: not only did many of his clients retain his services, but he now had the freedom and the time to work on his Ratings of Normal Value.
By 1935, Bernhard had worked out equations for 120 individual stocks, assigning each a rating based on the charting of prices and earnings over time. He bought a multilith press and printed 1,000 copies of the book, which he called the Value Line Ratings of Normal Value , setting the price at $200 each. "It was hard for me to realize how little the world would be interested," Bernhard said 50 years later in a speech before the Newsletter Association of America. His numerous calls to banks and other financial institutions resulted mostly in polite stares and only one sale, to a skeptical portfolio manager.
With an embarrassingly large inventory of 999 books in his office and much of his time and energy diverted from his investment counsel accounts, Bernhard was paid a visit by Major L.L.B. Angas, the publisher of an enormously influential financial newsletter. Although Angas refused to purchase a copy of the book, he agreed to review it in the forthcoming edition of his bulletin. A few days later, Angas made good on his promise, advising his readers that they "should own" a copy of the "young fellow's" book; however, the price had been lowered to $55. Not only was the value of Bernhard's inventory reduced by nearly 75 percent overnight, but he received a bill for $800 from the Major to cover the cost of printing the bulletin in which the endorsement appeared. The recommendation, though, proved to be a worthy investment: 600 checks for $55 appeared on Bernhard's desk shortly after the publication of the newsletter.
The lesson Bernhard had learned from the crafty publisher would guide his future marketing strategy. Instead of relying merely on personal representation, Bernhard channeled his resources into print advertisements to build the circulation of his fledgling newsletter. He invested $70 in a two-week advertisement in Barron's for $5 samples of the Value Line Ratings of Normal Value. Although the two ads brought in only nine leads and a $45 initial return, follow-up letters that included more information about the ratings resulted in the sale of three books at $55 each. Once again, what appeared to be a setback turned out to be a blessing.
For the first decade, Bernhard's formula for rating stocks consisted of simply tracking a security's past price and earnings history and projecting that into the future by multiplying a percentage of the company's book value by a conservative multiple of anticipated earnings per share. This relatively simple equation underwent a significant revision with the hiring of Samuel Eisenstadt, who brought his extensive knowledge of statistics theory to the company upon his arrival in 1946. Among the more sophisticated measuring instruments he helped to introduce was "multiple regression analysis"—the simultaneous comparison of a number of variables. The added complexity to Bernhard's basic formula did not, however, significantly improve the accuracy of the ratings. As Eisenstadt recalled in the Wall Street Journal , Value Line's predictive performance during this period was "ho-hum—just a little better than average."
The availability of computer technology in the 1960s enabled Bernhard and his chief statistician to add the missing variable to their formula. Using the computer's power to measure each stock's price and earnings characteristics against the comparable characteristics of all other Value Line stocks, they developed what became known as a "cross-sectional" method of analysis. In April 1965, they introduced what would become the hallmark of the Value Line rating system: the "timeliness" ranking, whereby all stocks in the survey receive a ranking of 1 to 5 based on the computer-aided analysis of several variables of financial strength and a prediction of investment suitability over the next 12 months. Despite widespread skepticism among mainline sources of financial opinion, the new methodology proved successful almost from the start. Value Line's team of statisticians noticed immediately that on average the top 100 stocks—those that received a Group 1 rating—performed better than their counterparts in other categories, rising more in strong markets and declining less in weak ones.
During the late 1960s and early 1970s, the stock market experienced a period of strong growth. Value Line fund managers, according to Tim Metz's profile in the Wall Street Journal , however, maintained a conservative outlook and were slow to react to the bullish market. When the company finally did take a more aggressive course, the market declined, causing some investors to lose money and confidence in the Value Line system.
A number of wide-ranging investigations by the Securities and Exchange Commission (SEC) provided other obstacles for the company during this period. In the late 1960s, the SEC accused Bernhard and another company official of taking fees in connection with two company funds without informing investors in the fund prospectus or remitting the funds. The agency also charged some company analysts with withholding information from Value Line subscribers and shareholders regarding their agreements to serve as financing or acquisition finders for companies they were following. Without admitting or denying the SEC charges, the defendants consented to a 1971 federal court injunction against future securities law violations.
In 1974, new scandals emerged that threatened to further tarnish the esteemed Value Line reputation. A former editor was accused of accepting a $15,000 bribe from two brokers in 1972 in exchange for writing bullish recommendations on two selected stocks. The 1971 injunction and the charges against the editor generated a host of civil lawsuits. While Bernhard denied the charges, they remained a hindrance throughout the decade, costing the company more than $500,000 in out of court settlements.
Value Line is the most trusted and prestigious name in the investment field. For more than a half-century Value Line has been synonymous with trust, reliability, objectivity, independence, and proven accurate performance and information for investors. We continue to develop and refine our investment information and analysis to meet the changing needs of investors.
Consistent with its proven ability to turn adversity into growth, Value Line did not fail to learn from its mistakes. By tightening investment standards and improving the methodology behind its stock rankings, the company succeeded in doubling subscriptions to the then $365-a-year Value Line Investment Survey between 1978 and 1983, while boosting annual revenues to approximately $40 million. Meanwhile, profits increased more than 80 percent, to $6.7 million, between 1980 and 1983. First, in an attempt to make its forecasts more objective by further removing the "human element," the company ended a three-year "experiment" that allowed the analysts' judgment factor to account for 20 percent of the weight in its stock rankings. The company also stopped its earlier practice of purchasing unregistered "letter stock" for which there was not yet a public market. In addition to boosting subscriptions, such policies contributed to the strong performance of the flagship Value Line Fund, which demonstrated average annual returns of nearly 33 percent between 1974 and 1981.
By 1983, the 375-employee firm had expanded its survey to include ratings on 1,700 stocks, while controlling $1.2 billion in assets through its six mutual funds. The success of the "timeliness" rankings, well publicized in such popular magazines as Time and Newsweek , contributed to the excitement surrounding Bernhard's decision to make a public offering of 19 percent of his company in April 1983. Widespread interest in new issues and stock investments in general at the time brought the selling price to $17 a share and helped the price to climb to a record high of $40 by the summer of 1984.
The company, aided by the more than $30 million brought in by the public offering, grew steadily during the latter part of the decade, boosting revenue to nearly $70 million by 1987, largely on the strength of the Investment Survey 's 30 percent to 35 percent operating margins. Although cautious with his approach to new ventures, Bernhard worked to expand the company by diversifying profitably into the money-management business, adding several new publications, and entering the investment software market.
In the midst of this period of expansion, though, the company also had to overcome a new challenge: a transition in leadership brought on by the death of its founder and leader, Arnold Bernhard. Although Bernhard's son, Van, who had worked for the firm for several years, seemed the probable successor, he declined the job, and his sister, Jean Buttner, who joined the company in 1982, was appointed CEO and given the task of leading the company through the challenges of a recessionary economy and a new era in technology. While the company enjoyed record total revenue and profits during the first year of Buttner's tenure, it suffered from a general malaise in the investment market following the stock market crash of 1987 and the ensuing recession of the late 1980s. Value Line, like many other businesses in the field, saw its pattern of vibrant growth come to a halt at the close of the decade.
With the new decade came the start of market recovery and a concomitant increase in the Investment Survey 's circulation. In 1992, Value Line's revenue returned to near record levels and profits climbed to an all-time high of $26 million. Despite the strong balance sheets, Buttner drew criticism for what Business Week 's Anthony Bianco described as an "autocratic" style of leadership that lowered employee morale. The company, long known for its ability to hold down costs and a forerunner of the downsizing trend, reduced its workforce from approximately 425 to 325 during this period, largely through resignations and firings that some believed threatened the stability of the company.
Despite drawing heavy criticism from disgruntled former employees and the media for her management techniques, Buttner, who received recognition as one of the top 50 businesswomen by Working Mother magazine, led the company to three straight years of record earnings, building on the growth that led Forbes magazine to name Value Line the best small company in the United States, based on return on equity. She was also moved to update the company to the demands of the Information Age, initiating and expanding the "Value/Screen" electronic database/software service, which covered 1,600 stocks, and DataFile, the institutional equity database covering 5,200 U.S. and foreign companies.
A number of new publications and features were also added to the Value Line fold during Buttner's tenure. The company more than doubled its coverage of the market by providing investors with the Value Line Investment Survey—Expanded Edition , which reported on 1,800 stocks not included in the flagship publication. Moreover, it added a separate 16-page newsletter called "Selection & Opinion," which highlighted individual stocks, reported general market and interest rate conditions, and offered three different model portfolios of 20 stocks to suit different types of investors. In 1993, the firm added mutual funds to its survey through the introduction of the Value Line Mutual Fund Survey , a biweekly publication that covered more than 2,000 funds. In 1995, the company also offered its first online service, negotiating a deal with CompuServe through which subscribers could access both the Value Line Investment Survey and the Value Line Mutual Fund Survey and could view individual company and industry reports.
While Value Line's stock picking ability had made its reputation, the company's own mutual fund family, drawn from the survey list, underperformed. The disparity, according to Forbes , arose from transaction costs tied to Value Line real world funds coupled with stock price spikes as Value Line readers and its own funds purchased top picks.
Moreover, Value Line's own stock lagged behind its publishing and money management peer group, according to Crain's New York Business. Value Line had been slow to sign on when the mutual fund market heated up; Morningstar would become the brand name in the mutual fund rating business. While the company had added electronic versions of its print products, subscribers switching from one format to another offered no net gain in market share. Competition had also heated up, coming from the vast stores of financial information of the Internet and from Morningstar, which had entered into the stock ranking business in 1997. Finally, mergers in the financial world created competitors with deeper pockets.
"Despite the stock's less-than-stellar returns the past few years, Ms. Buttner was paid about $1.4 million in fiscal 1997 and $1.2 million in fiscal 1996. About the same time, she won a nasty public fight with her twin, Arnold Van Hoven Bernhard, for control of the company," wrote Anna Robaton for Crain's.
A bull market did little to help Value Line revenues, according to Crain's , up only 2 percent for fiscal 1998, to $93.6 million. Net income suffered a drop of nearly 23 percent, to $35.2 million, due to a special dividend paid as part of the ownership settlement.
By 2000, Value Line's top picks had fallen below market returns for five straight years. The system depending on historical data and offering only weekly updates could not keep pace with the overheated market and light speed technology of the day. Most of the hottest dotcom stocks, lacking two-year price and earnings data, did not make the rankings. Some observers were writing off the service as out of step with the times; others pointed to the ongoing need for a reliable independent source of information, according to Money magazine.
Value Line, for its part, upgraded its technology during 1999 and 2000. Drawing in the new breed of investors, who did not even recognize the name, was another story. A hopeful sign was the reversal of the half-decade slippage by the end of 1999. Stock picks such as Qualcomm and JDS Uniphase pushed Value Line past the market once again, Lisa Reilly Cullen reported for Money . Value Line beat the S&P 500 by 20 points in 2000. Although top picks dropped 7 percent in 2001, Value Line stayed five points ahead of its large cap weighted rival, according to Kiplinger's Personal Finance Magazine .
Value Line's own large stock mutual funds continued to be "pedestrian performers," observed Steven T. Goldberg for Kiplinger's . In addition, stellar small stock funds lacked promotion. The Value Line's 15 mutual funds managed only about $4 billion in assets.
The financial world faced turmoil on many levels in the new century, ranging from the 9/11 attacks to internal misdeeds. In the midst of if all, the name Value Line was again on people's lips, as a possible remedy to what ailed Wall Street. Regulators were pushing to force investment bankers to provide clients with independent research in addition to their own. In 2003, ten major Wall Street firms settled with New York Attorney General Eliot Spitzer over conflict of interest claims and Value Line was among those companies likely to benefit from the new requirements.
Despite the ups and downs of its recent history, Value Line's predictive acumen had staying power. In 2005, the Hulbert Financial Digest ranked the Value Line Investment Survey second among rating investment newsletters for risk-adjusted performance over the past 25 years, according to the America's Intelligence Wire .
Value Line Securities, Inc.; Vanderbilt Advertising, Inc.; Value Line Distribution Center; Value Line Publishing, Inc.
McGraw-Hill Companies, Inc.; Morningstar Inc.; Thomson Corporation.
Baldwin, William, "Paying the Piper," Forbes , October 19, 1987, p. 208.
Bianco, Anthony, "Value Line: Too Lean, Too Mean?," Business Week , March 16, 1992, pp. 104–06.
Choe, Sang-Hung, "Value Line Had Another Bad Year—and Still Beat Market," America's Intelligence Wire ," February 11, 2005.
"Coming Out: A Top Stock Picker Goes Public," Time , April 25, 1993, p. 98.
Cullen, Lisa Reilly, "What Happened to Value Line?," Money , September 1, 2000, pp. 96+.
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Gandel, Stephen, "Stock Watch: Value Line Stands to Gain from Wall Street's Rehab," Crain's New York Business , October 28, 2002, p. 43.
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Kahn, Virginia Munger, "Nice Try," Financial World , March 14, 1995, pp. 77–80.
Metz, Tim, "Better Days," Wall Street Journal , January 14, 1981, pp. 1, 19.
——, "Value Line Plans to Sell 19% of Concern to Public for As Much As $34.2 Million," Wall Street Journal , April 8, 1983, p. 13.
Miller, Annetta, and Ellyn E. Spragins, "Family Values," Newsweek , October 10, 1994, pp. 48–50.
Opdyke, Jeff, and Jane Kim, "Stock Picker's Fund Lags," Grand Rapids Press , September 19, 2004, p. 16.
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Solomon, Robert S., "Value Line's Self-Defeating Success," Forbes , June 15, 1998, p. 294.
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Weiss, Gary, "Arnold Bernhard Is a Tough Act to Follow," Business Week , January 25, 1988, pp. 93–94.
—update: Kathleen Peippo
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