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, Walst2!l &.Cff.1 MEMBERS NEW YORK STOCI( EXCHANGE AND l,!OfNr NEW YORK PHILADELPHIA ANG!..is/ 5,)51 IYOFFICES CO!ST TO Ct.NECTEC tJY()\ \L .. ,TABELL'S MARKET LETTER COMMODITY EXCHANGES LUGANO (Swa,ldl .. January 20,1956 The Bow-Jones industrials made a decisive dovmside penetration of the thirty-eight day trading range between 490 and 477 and reached an intra-day low of 463.16 on Friday. hS mentioned in previous letters, this downside penetration indicates at least, a return to the lower part of the broad 490-433 range in which the market has held since June. The top pattern formed since November appears to indicate that the downside objective is around 445. The price action of individual groups has been quite diverse. Possibly the oils and natural gas issues have shown the best action. The action of the steels has been on the unfavorable side. If the aver- age reaches somewhere around 445, would add to holdings in my recommended list last published in the December 2nd letter. A year ago this letter made a compilation which aroused a good deal of interest. The introduction to this compilation read as follows Few people realize how diverse the action of the market has been over recent years. Regardless of the fact that the Dow-Jones industrial- average has advanced for over five years with just a few minor tions, the action of various types of securities has been quite differ- ent. Many holders show losses on individual securities despite the fact that the general market has been in a broad advance since 1949. As al- vlays, it has been dangerous 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 pre- supposes an investment of 5,000 each in such growth companies as Dow Chemical,-Corning etc. The second groupis 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 Oil of New Jersey, General Electric, National Dairy, -Sears Roebuck, etc. The third group consists of good quality dividend-paying issues a bit below the in- vestment quality of the second group. It consists of issues like hllied Stores, hllis 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 selling at around 20 or lower. It includes the issues in which the general public usually trades. It consists of issues like Armour, Avco, International Telephone, New York Central, Pennsylvania, Pepsi-Cola, etc. The figures in the above mentioned compilation have been brought up to date and the results are tabulated,below. Here is how the purchase of 100,000 at the 1946 highs of each of these groups would have looked at December 31, 1955. The table also shows the action of each group during the year 1955 alone Growth I-SSUB-S . Investment Issues Med-um-Grade Issues Low-Priced Issues 1946 High 100,000 100,000 100,000 Dec.'31,1955 272,573. 165,43l. 88,549. Plus Rise 1954-55 . 26 – — – 22 21 16 The most interesting thing to note about the above table is that the purchaser of low-priced speculative stocks at 1946 highs still has a loss nine years later. It is further interesting to note that the relative action of the-four grnups, with the growth issues showing the best action and the low-priced issues showing the least favorable action, continued during the year 1955 just as it had during the eight years previous. market letter not. and under no III to be conatruf!(i u. aD ot'fe!' to aceU or a KlhcltatlOn to buy any aeeurnte!!l reterred to herein The Informatlor. contained bereln not LI to ac,-uracy or and the th('reof is not, and under no IS tn beeonlltrued 8.9, a representatIOn l b1 & f;o, Ine All hn.ve an Intf're'lt In the or OpinIOn are subject to ehanKe- WIthout notlee-. Wabton II Co.., Ine, or any Officer. Dlreetor or Stockholder tbereof may mentlonetl heTeln. Thill. market letter ill Intol!nded and presented merely a geneTal, mformal commentary on day to day market and nt a analY1HS Adrl.lt.lOnal Information 'lt1; bot furnished upon WN lOt -I ., -2- The obvious conclusion to be drawn from the above is the terrific advantage involved, especially for the younger man who is not concerned with current income, in the purchase of growth stocks. It will be seen that even though purchases were made at previous bull market highs that in a period of less than ten years the growth stock investment has appreciated almost four times. It is also interesting to note that although the growth investment yielded only at the time of purchase, the current yield on . the original investment is better than 8. A tabulation of the earnings and dividends behind each of the above theoretical groups is also very instructive EARNINGS 1946 High 1955 –Plus Rise Plus R!.,se 194655 Growth Issues Investment Issues MedTum-Grade Issues Low-Priced Issues 5,998 6,482 7,724 5,530 18,177 18,783 15,619 9,451 203 174 102 71 27 12 25 106 DIVIDENDS Growth Issues Investment Issues Medum-Grade Issues Low-Priced Issues 2,503 3,520 3,080 1,543 8,707 9,676 6,908 4,996 248 175 121 223 11 10 8 122 It will be noted that, the rise of the Growth, Investment and Medium quality groups has been sparked during the first-eight years of the market cycle by increasing earnings and dividends — a factor which, until this year, had been strikingly absent in the case of most lowpriced stocks. A look at the, figures showing the percentage rise during the-year 1955, however, shows that both earnings and dividends for the low-priced group have doubled with very little corresponding market action. Various conclusions may be drawn fac t,'-It ispossible- on one hand to that the current bull market cycle will not be com- plete until low-priced issues move ahead beyond all reasonable value with an accompanying flurry of public participation in the market. It- is also possible to conclude, however, that the current market is per- haps a more intelligent one and the investor in 1955 is eying askance the earnings and dividends of companies which can improve profits only during a terrific business boom. The above is also borne out by a look at the yields and piE ratios of the four groups mentioned YIELD 194b 1949 1955 PiE RATIO 194b 1949 1955 Growth Issues Investment Issues Medrum-Grade Issues Low-Priced Issues 25 3.5 3.1 1.5 4.5 2.2 7.3 35 9.0 4.2 4.2 5.6 16.5 15.4 12.9 18.0 10.2 7.1 5.3 9.4 21.8 14.5 10.6 9.4 It will currently be seen that while the growth and investment issues-are close to their 1946 highs on both a yield and FIE basis, the medium-grade issues still have some room for appreciation and the low- – —psricaetd itis'ssuheosuldhabvee' attracted practically no public demand. – This perhaps On the basis of the above figures, it can be seen that the Growth and Investment issues are quite adequately priced at present and it may be even concluded that some are due for a fairly sharp correction. It can also be seen, however, on any weakness profit may become available in the Medium-Grade or even in some of the better Low-Priced issues. EDMUND Vl.TABELL (N'cJQ VlALSTON & CO.INC. r.S. The names of the individual issues in the four groups mentioned above will be furnished upon request.