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-r Walston &- Co. MEMBERS NEW YORK STOCI( EXCHANGE AND OTHER LEADING STOCK AND COMMODITY EXCHANGES NEW YORK PHILADELPHIA LOS ANGELES SAN FRANCISCO LUGANO (Swmld) OFfiCES COAST TO COAST CONNECTED BV DIRECT PRIVATE WIRE SYSTEM TABELL'S MARKET LETTER January 14, 1955 The market, as measured by the averages, held in a relatively narrow trading area during the past week. Probably the high of 412.47 on the Dow- Jones industrials reached on January 3rd and the low of 387.09 reached on January 6th will be the outer limits of a trading area for quite some time. In fact, over a longer period of time, I would not be surprised if the mar- ket held within an area bounded by, roughly, 425'high and 375 low for the next six months or longer. This would probably be the most constructive technical action that could occur. During such a period, of course, in- issues could pursue their own course. ' uew people realize how diverse the action of the market has been over recent years. Regardless of the fact that the Dow-Jones average has advanced for over five years with just a few minor interrupt'ions, the action of various types of securities has been quite different. Many hold- ers show losses on individual securities the fact that the general market has been in a broad advance Since 1949. hS always, it has been dan- gerous to buy the wrong securities at the wrong time. In the main, it has definitely paid to own quality issues over recent years. The following compilation may be of interest. It presupposes an investment of 100,000 in four different groups of stocks at the 1946 highs. The first group is composed of twenty growth issues and presupposes an investment of 5000 each in such growth companies as Dow Chemical, Corning Glass,I.B.M., etc. The second group is composed of twenty stocks of investment quality. It was selected from the twenty favored issues of 130 Common Trust Funds of leading trust companies. It includes such issues as General Motors, Standard of New Jersey, General Electric, National Dairy, Sears Roebuck, etc. The third group consists of good quality dividend-paying issues a bit below the investment quality of the second group. It consists of issues like Allied Stores, Allis Chalmers, Babcock & Wilcox, National Gypsum, Sylvania, etc. The fourth group consists of lower-priced, more speculative issues. It comprises the twenty most actively traded issues in 1953 sell- ing at around 20 or lower. It includes the issues in which the general public usually trades. It consists of issues like Armour, Avco, national Telephone, New York Central, Pennsylvania, Pepsi-Cola, etc. Here is how a purchase of 100,000 at the 1946 highs of each of ese groups would have worked out until Decembe-r 31st, 1954 ' 1946 High 12/31/54 Growth Issues Investment Issues Medium-Grade Issues Low-Priced Issues 100,000. 100,000. 100,000. 100,000.. '313,860. 222,625. 136;'512. 76,245. In other words, the purchaser of low-priced, speculative' stocks at the 1946 highs still has a loss eight years later. There is a reason for this as shown by the earnings behind each of these groups. 1954 earnings are estimated 194-6 1954 Growth Issues Investment Issues Medium-Grade Issues Low-Priced Issues 5,998. 6,482. 7,724. 5,530. 14,285 plus 239 -16,079 plus 251 12,486 plus 163 4,570 minus 18 Just as there is a reason in the earnings picture, there is also a reason for the diverse action in the dividend pattern. Here are the divi- dends paid in 1946 and 1954 3 Growth Issues Investment Issues Medium-Grade Issues Low-Priced Issues 1946 2,503. 3,520. 3,080. 1,543. -. -195-4 7,827. plus 313 8,826. plus 251 6,411. plus 208 2,243. plus 145 -2- 2 It is interesting to note 1/2 at the time of purchase, that the Growth Issues were but are now yielding almost 8yiebldaisnegd only on the original purchase price. Of course, to the purchaser today, the yield is only 2.4. That is the outstanding characteristic of growth issues. Yields are low at purchase, but the growth 'in earnings and dividends eventually result in a larger return than on defensive and cyclical issues. Of course, the rise of the last fifteen months has resulted in yields and price-to-earnings ratios that are comparable to those reached at the top -of 1946. The tables below illustrate the approximate /E ratios and yields that prevailed at 1946 top, the 1949 low and at the end of 1954. YIELD. 194b 1949 1954 PLE RA.TIO 194b 1949 1954 Growth Issues Investment Issues Medium-Grade Issues Low-Priced Issues 2.5 4.5 2.4 33..15 97..03 43..97 1.5 4.2 29 16.5 10.2 21.8 15.4 7.1 13.7 12.9 18.0 5.3 10.9 9.4 15.5 On the basis of the above figures, the growth issues are selling higher than the 1946 ratios and the investment group are approaching the ratios reached at the 1946 high. Of course, increase'in earnings and dividends would change this picture, but any sharp price increase in these two groups would be unjustified under present earnings and dividends. These two groups appear to have corrected the undervaluation that has existed for over eight years. The medium-grade group still appears to offer the best profit opportunities with the least downside risk, particularly in issues that appear to be graduating from medium-grade to highergrade. I have recommended issues of this type such as American otash, Babcock & Wilcox, Penn-Dixie Cement, Western Union, etc. J,lso ,-I still like Dresser Industries, Joy Manufacturing, Black & Dec,ker, etc. – The low-priced stocks still offer opportunities for price appreciation, but here the risk is much greater as witness the fact that buyers of some of these issues at the top eight years ago are still under water. The above is based on fundamentals. From a technical viewpoint, a great many issues have reached their upside objectives, but have as yet formed no vulnerable tops. A large number of issues still indicate higher levels. It is possible that the recent decline is the start of a distributional top pattern, but if this is so, considerable time will be needed to complete the pattern and, as in 1946, there should be plenty of signs of deteriorating patterns. These signs are not yet evident. EDMUND W. TABELL WAlSTON & CO. P.S. If you desire the names of the individual issues mentioned above, I will be very glad to furnish them to you. EWT 4-groups LM .,.. … Following ;re the stpcks used in the (!or.lpllatlon of Q;l'OUPS as outliu,ed market letter of ,iamlal',f 14,1955 20 Aluminium, Ltd. Allleriada . Ca!'l'l.er Corning Glass Dm1 Cherl'lica 1 DuPont El Paso Natl.Gas Goodrich Inter.13us.M \inn . HoneYNell lttnn .Minlog I'jonsanto NOaltenl.sonCaol rLneiandg Pfizer Radio COlt') Hohrn & Haas Scott Papel' Shell Oil 1)1,ion Carbide 20 Al\1er1.can Can AllIer .Cyanamid DuPont Oenenra1 Electr!.e General Foods Genera I f!OtOI'S Gulf Oil Johns r'llI'1ville Kennecoi;'i Natlonal Dairy Penney, J.O. Phillips Pete Sears Roebuci4 Socony Vacuunl Stand.Oil Stand.On Stand.Oll ooorff Calif. Ind. N.J. t'exas Union Caro!.de \'lestinghouse Elec. 20 Allied Stol'es Allis Chalmers Babcoc!c & i'filcox Blew-Knox BucYiMlS Erie Burroughs Chain Belt Clev .Elee .n.l. Crane Distillers C,Oll'P. S JEolyliott Lowenstein Nead National Gypeum NY Ail' Bra!ce Penn-Di1,ie Cement Rheem iljg. Sylvan1.a Elec. Yale 8; To.me fi.rner .Air11nes Aveo BaU.a 01'110 Canada Drir Colum1bia Gas Emerson Radio Gimbel ILnoet1; , 8 & Tel Nack N.'1..Centll'al Pan ArnericaI'l Penn.n.R. Pep;IJ.-Cola Raytheon Rexall Drug Servel Spiegel Studebal-cel'-Pacard I .4'