My friend and proven money manager Tim Melvin just sent me the list of this year’s Value Line plays. Value Line is one of the grand daddies of investment research. These guys have been around for about 75 years, and were one of the first in the industry to introduce the idea of statistical analysis to investing. They have various proprietary ranking criteria that they apply to all of the stocks in their universe, and one of the more interesting ones is their Timeliness Ranking. Timeliness is a prediction that Value Line’s computers make for what kind of performance a stock is expected to have in the coming year, based on proprietary formulas that take into consideration price, earnings and momentum. Each stock is given a Timeliness rank, with stocks given a 1 being the most likely to beat the market and stocks given a 5 the least.

According to the Value Line people themselves, the results of this system in past years has been staggering. But there are too many stocks that are ranked 1 or 2 for an individual investor to buy all of them, so Tim likes to apply an interesting twist. He screen’s for the Value Line stocks with a Timeliness ranking of 1 or 2, and then buy’s the ones that are trading under $10. In his own words: “These tend to be companies that have fallen out of favor with the market but are starting to turn around. Since earnings growth and price momentum are a huge part of the value Line system, the companies are starting to turn a corner and the market is seeing it.”

The results have been staggering. According to Tim’s backtests, trading this simple strategy with annual rebalancing has netted close to 19% per year for the past 20 years. Doing some more work and rebalancing quarterly has made 21%. Last year the portfolio made an eye-popping 60%. One warning however: this strategy is not for the risk averse. Month to month swings can be very large, and draw downs of 30% have happened in the past. Regardless, I like this strategy because it meets several of my most important qualifications: One, Its scientific and based on hard numbers. Two, It has a good track record. Perhaps most importantly of all, someone who I know and trust has used it to make money.

Omid Malekan