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Walston &- Co. NEW YORK NEW YORK STOCK EXCHANGE ANO OTHER LEADING STOCK AND COMMODITY EXCHANGES PHilADElPHIA lOS ANGELES SAN FRANCISCO LUGANO ISwwldl OFFICES COAST TO CQASr COlNECTE'c;. BY DIRECT PRIVATE WIRE SYSTEM TAB ELL'S MARKET LEnER February 4, 1955 The Dow-Jones industrials failed in their first attempt to penetrate the January high and break out on the upside of the 412.47 – 385.65 area in which the average has held since the first of the year. Tuesday's high was 411.63. The rails also failed to better the January high and still remain in the month-old trading shelf bounded by 147.73 high and 137.00 low. Based on the action of individual issues,it would appear that the odds favor an ultimate upside breakout of the trading ranges in both averages. Looking at the market from the longer term point of view of intrin- sic values, it must be realized that a great many issues, at present price levels, are no longer on the bargain counter. For the past seven or eight years, stocks were grossly undervalued in terms of earnings and dividends. The rise of the past sixteen months has gone a way toward correcting this undervaluation. As measured by many better-grade stocks, the market is about normally valued at present prices, earnings, dividends and money rates. Any sharp price rise from these levels without a comparable rise in earnings and dividends would result in ultimate overvaluation. That is why a resting period at this stage would be a favorable development. Of course,all stocks have not discounted the favorable potentials and there are a great many issues that appear attractively pricedat present levels.This letter has attempted to draw some of these issues to your atten- tion.This has resulted in a recommended list that is reviewed periodically. As this letter is read by individuals with varying investment or speculative objectives, the investment quality of the list also varies con- siderably. The main reascnfor my recommendations has been long capital appreciation with a few issues mentioned for their generous yield and fair appreciation prospects. Each individual must decide whether each issue meets his indiVidual investment or speculative requirements. I have decided that the list is too lengthy and have eliminated twenty-seven issues. These are listed at the end of the letter. The reasons for the elimination are varied,but mainly because the issues eliminated have about reached their upside objectives on my technical work,or else have failed to perform as creditably as expected. Most of the issues eliminated show a profit. A rough approximation shows 390 points profits as against 15 pOints loss. The issues eliminated can be replaced by issues marked buy in the list below Price Fresent ST 0 CK Rec.om. Price Yield J.,dvice Abbott lab. Alleghany Corp. Allegheny Ludlum Allied Stores Allis Chalmers f.merican Chain Amer.Encaustic Amer. Potash & C Amer.Radiator ,mer. Tel & Tel f.SSOC .Dry Goods Balt.& Ohio Black &, Decker Blaw-Knox Bucyrus Erie Burroughs Celanese Celotex . Certain-teed Chain Belt Chic.& East.Ill. , Cities Ser. w.i. City Pruducts Colgate-Palm. Columbia Broad. Combustion Eng. Cutler Hammer Consol.Nat.Gas 40-45 33/4 3333-30 30-33 '7 40 14-16 150 26 23-25 39 22-23 15-17 31-37 20 1530-35 18 38 37 60 30-33 11-5 57 25-27 485 43 55 77 38 12 72 24 175 28 3 57 28 38 25 24 29 26 48 24 51 36 60 88 61 62 – I, 4.1 4.6 5.4 5.2 6.5 5.8 2.8 5.3 5.1 5.7 2.6 34.35 5.3 4.0 2.1 5.2 4.8 5.2 4.2 39 6.9 4.2 2. 6.2 4.8 4.4 Buy for slow 60-70. Hold for then 17-1 Hold for 60-75. Hold for 72-77. Hold for 90. Hold for 35-34. Hold for 17-19. Hold for 100-120. Hold for 27, then 43. Hold for income and 200. Hold for Hold for Hold for 5250. Hold for 4550.BuF 26-25. Hold for 42-44. Hold for Hold for 31-34. Hold for 31, then 44. Hold for 29, then 41. Hold for 65, then 80. Hold for 32. Hold for 76. Buy for income. Hold for 75-100. Hold for long term growth. Hold for 83-87 Hold for long term over 1)( Hold for 40-45. -2- Thus, cash flow earnings (net plus amortization and depreciation) were about 8.05 per share as compared with reported earnings of 2.30. The comparable figures for the past five years are tabulated below Reported Net Earnings Cash Flow Earnings 1950 1951 1952 1953 1954 7.07 5.40 3.37 4.40 2.30 9.14 7.54 7.03 9.49 8.05 The ability to maintain cash flow earnings at such a high rate is newencouragiDg rat..f-., QLoperations in 1954 andthe heavy burden ofreloCclting anCistarting up Thus that the normal earnings of the company in the future will be considerably above both the reported net of 2.30 per share for 1954 and the reported net of 4.39 per share for the average of the past ten years. Starting in 1955, the improved efficiency of the new units and the . reduction of relocation and starting up expenses should, together with im- proved business conditions, result in much better earnings figures. VJhire the accelerated amortization will reach a peak in 1955 and hold down reported earnings for a few years longer, this will be largely offset by above average growth in stainless and other alloy and specialty steels. Stainless steel use in the past has doubled about every ten years since it was introduced in 1920. Military and atomic applications are increas- ing rapidfY. Use of stainless steel as an exterior building material, re- placing materials such as masonry, is growing as witness the three all-stainless steel skyscrapers in Pittsburgh. Future growth is also expected from wider usage by such industries as automotive,electrical equipment, aircraft, chemical and consumer durable goods. Allegheny's interest in new metals led it to form, jointly with National Lead, the Titanium IVletals Corporation of America which produces titanium metal sponge and ingots at Henderson, Nevada. Production is about lay, b\lt ;isgrowing .. ThiolL imp.o.rttqt (utUj'sL sour.c.e . of-revemie,-llut the compariy fs not looking to this aspect of its opera- tions for substantial earnings for some time to come. Allegheny Ludlum produces melted and rolled zirconium and also has done work on rare earth combinations with steel. The company also has a 35 interest in Continuous Metalcast, which owns rights to the Rossi continuous casting process. The stock should be of interest to the investor who is interested in long term growth. While it is selling at almost twenty times reported earnings for 1954, it is also selling at roughly only ten times average earnings for the past ten years and only five times cash flow earnings. It has paid 2.00 in dividends since 1943, plus occasional extras and stock dividends. It sold as high as 61 1/8 in 1946 and at 52 1/8 in 1951. It has sold higher present levels in five of the past ten years. It is one of the largest factors in the stainless steel industry and because of an aggressive research program, it has two processes, continuous cast- ing and hot extrusion, wh'.ch are still in the early stages of develop- ment, but could have important commercial possihilities. For the longer term, it has an interesting potential in titanium and rare metals. The technical pattern on thestock is quite constructive. The ability to move out of the long 26-39 trading area suggests an interme- diate term 75. Over the nearer te)'m, the pattern.is.also.constructive. The out of the trading area late last year to reach a high of 45 3/8 in December. It has been resting and consolidating since that time in the 39-45 range. Ability to reach 46-would indicate a near term 50-55. There is good downside support at 39-37. Therefore, it appears that the stock has an upside potential of thirty points or 70 over the foreseeable future as against a risk potential of eight pOints or 17. Purchase of this equity is advised for those interested in long term growth. EDMUND TABELL WALSTON & CO.