Small- and midcap stocks will be below-average performers over the next five years. That’s a discouraging prospect, since these sectors have already suffered more than the broad market. The Russell 2000 index
for example, is 22% below its all-time high. The blue-chip-dominated Dow Jones Industrial Average
in contrast, is just 9% below its all-time high.
This disheartening prediction comes from a valuation model that sports an impressive record predicting stocks’ subsequent five-year return. It is based on a single number published each week in the Value Line Investment Survey, the flagship newsletter published by Value Line, Inc.
The number represents the median of the projections made by Value Line’s analysts of where the 1,700 widely followed stocks they closely monitor will be trading in three to five years’ time. This number is referred to as VLMAP, for Value Line’s Median Appreciation Potential. Though different VLMAP followers have different rules for translating the number into a particular market timing judgment, in general they increase and decrease their equity exposure levels in sync with the VLMAP. The accompanying chart plots the VLMAP and the Russell 2000 index’s subsequent 5-year annualized return. The chart starts in 1979, since that’s when the Russell 2000 index was created. (The VLMAP itself dates back to the early 1960s.) I constructed this chart to focus on the Russell 2000 and a five-year forecast horiz …