The Value Line Median Appreciation Potential has a good record forecasting smaller stocks’ returns. And the next four years look bearish. Smaller stocks will face stiff headwinds over the next four years.
That’s a dispiriting prospect, since smaller stocks have already suffered a lot since hitting a high earlier this year. The Russell 2000 index of smaller stocks is more than 10% below the high it set in mid-August, for example. Furthermore, nearly 40% of stocks in the S&P 500 are in bear-market territory, as measured by being at least 20% below their respective highs.
The reason to expect these stocks to continue suffering is a little-known indicator known as the Value Line Median Appreciation Potential (VLMAP). It reflects the median of the projections made by the analysts at Value Line of where the 1,700 stocks they follow will be trading in three to five years’ time. Though the VLMAP shows little ability to forecast the subsequent four-year returns of the S&P 500 , it has an impressive track record when it comes to the Russell 2000 index of smaller- and mid-cap stocks — as you can see from the accompanying chart.
To appreciate the strength of its track record in this regard, consider a statistic known as the r-squared. It measures the degree to which the VLMAP predicts subsequent four-year returns. In the case of the S&P 500, VLMAP’s r-squared is a statistically insignificant 0.8%, but it is 20.5% for the Russell 2000.
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I last wrote about the VLMAP in November 2024. I quoted Dan Seiver, who at the time was very bearish on small- and mid-cap stocks. Seiver is editor of the PAD System Report and an emeritus economics professor at Miami University (Ohio) and a member of the economics faculty at Cal Poly University.
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