an analysis of value line s ability to forecast long-run.pdfVIP

Journal Of Financial And Strategic Decisions Volume 10 Number 2 Summer 1997 AN ANALYSIS OF VALUE LINE’S ABILITY TO FORECAST LONG-RUN RETURNS * * Gary A. Benesh and Steven B. Perfect Abstract Value Line’s success in predicting short-term stock price movements via its timeliness rankings is widely publicized. Evidence pertaining to the accuracy of Value Line’s long-run (3- to 5-year) stock return forecasts is scarce. Here, we assess the accuracy of these long-run forecasts over two non-overlapping five year periods. The findings indicate that for these periods the forecasts were of little use in discriminating how stocks actually perform over the subsequent five years. INTRODUCTION During the last three decades, Value Line has developed a reputation as one of the premier investment advisory services. Its prominence in the industry is, at least, partly attributable to its demonstrated ability in predicting short-term stock price movements. Starting in 1981, Value Line also began providing forecasts of average annual returns over the long run, namely the next three to five years for each stock. The purpose of this paper is to assess the accuracy of Value Line’s long-run return forecasts, and the usefulness of these forecasts to investors. Prior academic research has focused on Value Line’s timeliness rankings which purportedly measure probable stock price performance over the next six to twelve months. The approximately 1700 stocks covered by Val