Coming Out

A top stock picker goes public

Arnold Bernhard, 81, spotted his chance after the stock market crash of 1929. Figuring that the public was aching for reliable investment advice, he set up a firm to provide it. The result was the weekly Value Line Investment Survey, first published in 1935. Today 111,400 subscribers get Wall Street's most popular major advisory service (cost: $365 a year). "All you need is an idea and faith in yourself," says Bernhard, who had dabbled in journalism and playwriting before turning to Wall Street. In a much awaited public offering, Bernhard will sell 19% of his company by early next month. The sale is expected to earn him as much as $34 million in cash and make his remaining 81% interest worth some $145 million.

Value Line (1982 profits: $6.7 million) has won a high standing among investors by offering clear and detailed guidance on 1,700 specific stocks. A typical page of the investment survey is packed with graphs and tables and includes a chatty summary of each company's prospects. The most avidly followed feature is the special "timeliness" ranking, which rates stocks on a scale of 1 to 5 (1 means time to buy; 5, hold on to your cash).

All this information appeals to both big and little investors. Robert Farrell, Merrill Lynch's chief portfolio strategist, calls Value Line "the most useful analytical tool on my desk." Says Robert Andrialis, group vice president of Standard & Poor's, a competing service: " Value Line is No. 1 with individual investors."

Stocks recommended by Value Line have established an astounding record of outperforming the market. An investor who bought the 100 top-ranked stocks each year since 1965 and held them for twelve months would have scored a gain of more than 1,300%. The Dow Jones industrial average, by contrast, has risen less than 30% during the same stretch.

Bernhard's method is based on comparisons of price-and-earnings data for companies. The Value Line computer ranks each stock against the rest of the 1,700 in terms of short-and long-term price performance and earnings history. Analysts throw in an "earnings surprise" adjustment when a firm's profits depart sharply from projections. Says Bernhard about his system: "It's so simple that I'm amazed and a little hurt that it isn't more widely copied." Some experts, however, ask whether the fact that so many people follow Value Line's advice may not be the real reason for the success of its picks.

In addition to the Value Line advisory service, the 375-employee firm manages six mutual funds with $1.2 billion in total assets. They include the Value Line Fund, a growth and income vehicle whose five-year gains have averaged 188.7%. Bernhard himself has benefited mightily from its results. He holds nearly $90 million worth of the funds his company manages.

Despite his age, Value Line's founding father remains highly active in the company, putting in twelve-hour days at his Westport, Conn., home or the firm's Manhattan office. "He runs the place with an iron hand," says a former employee. Nonetheless, he has attracted notable talent. Otto Eckstein, the head of Data Resources, an econometric forecasting firm, was a summer intern at Value Line. John Shad, chairman of the Securities and Exchange Commission, also was an employee.

Value Line is expected to remain a family-dominated concern even after it goes public. Five relatives sit with Bernhard on the nine-member board. They include his wife, his son and his daughter Jean Buttner, who in January was named vice chairman. That move apparently vexed Dorothy Berry, Value Line's president since 1979, who is leaving the company next month. Bernhard will then assume the role of president in addition to his job as chairman.

Bernhard says that he toyed with the idea of selling Value Line several times. American Express, CBS Inc. and the Washington Post Co. are among the companies that made offers for the firm, but such talks always collapsed, mainly because Bernhard wanted too much. Says he a bit puckishly: "If I sold, I would not be important any more."

Wall Street is showing great interest in the sale, which is expected to bring a price of $15 to $18 a share. But there is one stock on which Value Line is unlikely ever to give a report: its own. This file is automatically generated by a robot program, so viewer discretion is required.