Value Line: Growing Risks

Aug. 19, 2018 8:19 PM ETValue Line, Inc. (VALU)
Patrick Doyle profile picture
Patrick Doyle


  • I'm taking the money and running from this company until valuations return to reasonable levels. My four-year return was delivered in four months, which is excessive.
  • The shares are very optimistically priced which highlights a certain mania in the market, in my view.
  • The company's EAM business represents a very large percentage of profits, and that business is tightly tied to an elevated market.

Since I wrote my bullish article on Value Line, Inc. (NASDAQ:VALU) four months ago, the shares are up about 34%. While that’s gratifying, I think the risk-reward of a company that’s trading at 16 times earnings is much different than one that was trading at 12 times, so I need to look in on the name again. I need to re-evaluate my investment thesis to see if it still holds. As my regular readers know, I have been droning on about market risk with increasing regularity and urgency, and I’d like to continue this theme today with a discussion of Value Line. I’ll get right to the point: I don’t recommend that marginal investors buy these shares at these levels. I think investors would be wise to take gains off the table and switch to safer sources of income. While I’m not suggesting that the business is broken in any way, I believe that at current multiples, the market is mispricing the risk inherent in the business model. When I first wrote about this company, I characterized it to friends as a “no-brainer.” It no longer is and the marginal investor should avoid.

Emerging Risk

There’s still much to like about Value Line. Even ardent bears seem to acknowledge that quality of the periodicals business is intact, and growing by ~$4 million per year. That said, over the past few months I’ve become more bearish on the market in general, and I must acknowledge that Value Line is heavily geared to the market. My growing unease is evidenced by the fact that for weeks now I’ve generally recommended a strategy of switching to call options as a means to capture most remaining upside at far less risk.

Financial Snapshot

Since I wrote my piece in April, the company has released new

This article was written by

Patrick Doyle profile picture
I'm a quant investment newsletter writer who marries fundamental analysis with the latest research in momentum. Over the past few years, I’ve developed a piece of software that helps me track the level of optimism and pessimism embedded in stock price. I seek to challenge the assumptions embedded in price by profitably exploiting the disconnect between what the market thinks and what is a likely outcome. I invest in those companies that have a greater than average chance of giving us all a surprise in the next few months.

Disclosure: I am/we are long VALU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm currently long the stock, but will be selling it today or early next week.

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