Value Line, Inc.

1929–1980

Value Line, Inc. is perhaps best known for publishing The Value Line Investment Survey, the most widely used independent investment service in the world. With more than 100,000 subscribers and approximately half a million readers, the company's flagship weekly periodical, which provides comprehensive information on more than 1,700 stocks, is generally considered to be the bible of Wall Street. Long known for its strong and consistent record, the 60-year-old information service is regarded by many as the world's best-performing financial newsletter. Since 1980, the Investment Survey has been ranked No. 1 by the Hulbert Financial Digest. Other publications bearing the venerable company name include the Value Line Mutual Fund Survey, which provides full-page profiles of more than 1,500 mutual funds, and the Value Line No-Load Fund Advisor, a monthly newsletter covering no- and low-load funds. The company also serves as an investment adviser for the Value Line Family of Mutual Funds, a diverse group of 15 investment companies, and manages investments for private and institutional clients, while also furnishing financial database information through various on-line computer services.

Early History

Value Line was founded in 1931 by the 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 twenty-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.

Meanwhile, profits increased more than 80 percent, to $6.7 million, between 1980 and 1983.

1946–1965

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 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: 60 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 channelled 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.

Postwar Growth and Innovation

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 included the use of "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 earning 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 twelve 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.

Challenges of the 1970s

1971–1984

During the late 1960s and early 1970s, the stock market experienced a period a 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 of 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-laws 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.

Recovery and Growth in the 1980s

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.

1982–1995

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. Although 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.

The 1990s and Beyond

With the new decade came the start of market recovery and a concomitant increase in the Investment Survey's circulation. In 1992, Value Line saw its revenue return to near-record levels and profits climb 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 work force 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 has been named 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 America, based on return on equity. She is also credited with updating the company to the demands of the Information Age, initiating and expanding the "Value/Screen" electronic database/software service, which covers 1,600 stocks, and DataFile, the institutional equity database covering 5,200 U.S. and foreign companies.

A number of new publications and features have also been added to the Value Line fold during her tenure. The company has more than doubled its coverage of the market by providing investors with The Value Line Investment Survey--Expanded Edition, which reports on 1,800 stocks not included in the flagship publication. Moreover, it has added a separate 16-page newsletter called "Selection & Opinion," which highlights individual stocks, reports general market and interest-rate conditions, and offers 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 covers more than 2,000 funds. In 1995, the company also offered its first on-line service, negotiating a deal with CompuServe through which subscribers can access both The Value Line Investment Survey and The Value Line Mutual Fund Survey and can view individual company and industry reports. Whether or not Value Line can continue to hold its position as the top-rated investment newsletter may depend largely on its ability to adapt to the demands of the computer age.