I have been a subscriber to Value Line since 2011. During my first two years of subscription, I was dumb enough to think it was a waste of money because I didn’t have time to read every single company report. Although I have an accounting background, as a novice value investor, I didn’t know enough about businesses and investing to fully appreciate the power of the Value Line reports.
Better late than never! A few months ago I started to take a few hours every week to read every page of the Value Line reports. I have to say, Munger was right, it is a human triumph. In this article, I will share with the readers one great use of the Value Line Reports – spotting great businesses.
One thing I love about Value Line is that they group companies from the same industries, which makes comparison so much easier.
As always, let me illustrate my point with an example. We will look at the Value Line Reports of 4 banks. You will be able to tell why Wells Fargo is Warren Buffett (Trades, Portfolio)’s favorite banks at the end of the exercise without knowing too much about the business (I’m not suggesting take shortcuts here).
Below are the latest Value Line Reports for Bank of America, Citibank, JP Morgan Chase and Wells Fargo.
I’ve highlighted the two metrics Warren Buffett (Trades, Portfolio) used to evaluate the quality of a bank. For further discussion, I encourage the reader to read Buffett’s early letters to Berkshire shareholders.
Wells Fargo’s ROA and ROE handsomely beats all the other three big banks with an admirable margin, both in good times and bad times, with a lower level of leverage. Look at the ROA prior to the crisis, during the crisis, and after the crisis. These numbers are so simple but so powerful. They reveal the quality of management, capital discipline, and earnings power. With low leverage, the highest ROA and highest ROE, is it a wonder why Buffett and Munger love Wells Fargo?
You can also tell JP Morgan is also a high quality bank, although not as good as Wells Fargo. Bank of America and Citibank are struggling to get the ROA and ROE back on track but it will be a long way to go.
Of course you should not stop here. Identifying the best business in the industry is just a start. You should then ask yourself why is that. Why Wells Fargo can earn a higher ROA and ROE than Bank of America? By keep asking why and exploring the answers, you will get a lot of valuable information about an industry.
You can guess my suggestion to you – pick up a Value Line report and start digging. It doesn’t take a 180 IQ to spot the best business within an industry. All you need is a little patience.