If you’re searching for conservative, long-term investments, look no further than the market’s most stable stocks. They fulfil the first requirement for being graded a high-quality stock.

This principle, which states that price stability beats earnings and dividend growth as a significant factor in identifying investment quality, was discovered by Arnold Bernhard, one of the first scientific researchers into securities and market analysis.

Bernhard, whose finding has been echoed in various ways by later investment researchers, had already founded Value Line Investment Survey and had been using this analysis for years when he published his conclusions in 1959.

Value Line went on to find more sophisticated methods of stock selection — all proprietary and none revealed publicly. But Bernhard’s original method works well. It depends on simple arithmetic rather than complex mathematical formulae. And wasn’t it another founder of investment analysis, Benjamin Graham, who said any investment analysis that goes beyond arithmetic or simple algebra is suspect?

The accompanying table presents Investment Executive’s third review in the past four years of the price stability of leading stocks trading on the Toronto Stock Exchange. The starting point is a screening of more than 200 stocks based on their performance to yearend 2005.

The 75 companies on the list have the best price stability ratings we can find. Although the stability scores themselves are meaningless because they are arbitrary ratios, their relative standings are significant. For instance, a stock with a stability score of less than 0.200 is extremely stable.

Generally, large-cap stocks have the best price stability and quality ratings, no matter how you measure those. This list, however, includes quite a few smaller companies. Shares of many of these trade infrequently — “by appointment,” as past market slang put it. So this list is custom-made for individual investors. No money manager would touch the slow traders.

As one would expect, utilities stand high on the list, generally ahead of banks. Integrated oil companies rank fairly high, too. And one stock from the volatile gold sector — the bullion-centred investment trust, Central Fund of Canada — also makes the list.

But most of the oilpatch’s biggest leaders drop below the cut-off point because this group of stocks has become less stable over the past three years. This indicates they have become a bit more speculative and less investment-grade because of their rapid price rises.

So, are these 75 stocks a worthwhile group to invest in? Even though extremely stable stocks have a reputation of lagging in price action, this survey says otherwise. For the five years ended Dec. 31, 2005, the average gain of the 75 stocks on the list was 103%, vs a gain of 26% for the S&P/TSX composite index in the same period.

Almost all stocks on the list pay dividends. This, in part, reflects the survey’s bias — in addition to S&P/TSX composite index members, the screening started with other dividend payers as well as some high-profile stocks that don’t pay dividends.

Some names you might expect to find on the list are disqualified because they lack the required trading history. A stock’s price action over 11 years provided the data Bernhard needed for statistically significant measurement. He used annual high, low and average prices, and adjusted them for each stock’s long-term price trend, whether up or down.

The 11-year period covers more than two normal market cycles, long enough for the market to get a measure of a firm in good times and bad. And that, in the long run, is what conservative investors want to discern. IE