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NEW YORK Walston &Co. Inc. MembeTS New York Stock Exchange SAN FRANCISCO LOS ANGELES PHILADELPHIA OFFICES COAST TO COAST CONNECTED BY DIRECT PRIVATE WIRE SYSTEM CHI!AGO TABELL'S MARKET LETTER , June 20, 1958 In January, 1955 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 interruptions, the action of various types of secu- rities has been quite different. Many holders show losses on individual securities des- pite the fact that the general market has been in a broad advance since 1949. As always, . it hl-s the wrong wrQ!lK..1ime. main,it -has definftely pal.dio own-'qu-ali(Y-issues over years. The following compila'iion 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, IBM, etc. The second group is composed of twenty stocks of invest- ment 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, Stand- ard 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 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 selling at around 20 or lower. It includes the issues in which the general public usually trades. It consists of issues like Tele- phone, New York Central, Pennsylvania Railroad, Pepsi (iJ The conclusions drawn from this study in 1956 when it was repeated, were pretty well cut and Tlksltudv that the growth -group-outperfOl-med..all-the otheI' gl'OUpS -oy- cS taitt(a. argin.' -next best–per- – forming group was the he medium-grade and then by the low-priced issues. So of the last group that the buyer at 1946 highs showed a . g of the period and, indeed, could have recouped his 1957 high. i ti (y-Y Y selling each stock at very close to its 1956- The same ra in ained during the 1946-1949 bear market. During this period the growth gr aepreciated to only about 88,000, the investment group to 80,000, the medium-grade group to 56,000 and the low-priced group to 36,000. Thus, the study showed that in both an up and a down market the buyer of growth stocks had a clear advantage over the purchaser of other types of securities and that the lowpriced trading issues would have turned in an amazingly poor market performance. As shown below, the study has now been brought up to date. The value of each portfolio has been refigured taking (1) the price of each stock at its 1956-1957 high, (2) the price of each stock at its 1957 low, and (3) its current price. The con- clusions to be drawn today are not so clear cut. Loss Net – – – – 1946, 1956-57 High 1957 Low Decline Current Regail'.cd -Lo-ss Growth 100,000 580,012 357,508 38 442,931 38 24 Investment 100,000 314,654 211,821 33 260,841 48 17 Medium 100,000 210,326 114,173 46 134,800 21 35 Low 100,000 103,792 56, 537 46 85,046 60 18 — As is shown, the usual pattern of relative performance continued. as far as the 1956-1957 high,with a 100, 000 in growth stocks appreciating to over This mnrket letter IS not, Bnd under no circumstances IS to be construed IS, an offer to sell or a sohCltation to buy any sC'Cuntles referred to herem The mformatlon ('ontnlned herem 15 not guaranteed as to accuracy or completeness and the furnlshmg thereof IS not, nnd \mder no Circumstances IS to be construed as, a representa- lIOn by \\'nl;ton & Co, Inc All ell.preSSlons of opmlOn arc subJect to Without notice Walston & Co. Inc., and Officers, Stockholders and Employees lhCTf'Of, purchnse, sell and may have nn mter(!1lt In the secuntlC!! mentioned herem ThiS market letter IS mtended and presented merely as a Informal commenlary on du) to da mdrket news and not us a complete Adrhtlonal mformatlon With respect to any SeCUrities referred to herein …. Ill be furlli!ohei upon r e J u e s t ' \\ 301 -2- 580,000, while the low-priced stocks barely recovered to their 1946 prices. Since that time the record has been somewhat different. The two most startling performers have been the investment-grade issues and the low-priced issues. The former had the smallest loss during the 1956-1957 period, depreciating only 33. 48 of this loss has been recovered at current levels for a net loss of only 17. The low-priced issues issues,while having the largest loss (46),have also shown the largest recovery since their lows,and current prices are only 18 belowihe 1957 high. The growth issues, formerly the leaders, had a 38 decline and recovered only 38 of their loss, so that they are still 24 below their highs. Meanwhile, the medium-grades acted the worst with the largest loss and the smallest recovery for a net loss of 35. Some clues as to the reasons for this change in pattern may be gathered from comparative earnings. The following table shows price earnings ratios for each group in 1946, 957.highs, … Growth Issues Investment Issues Medium-Grade Issues Low-Priced Issues 1946 16.5 15.4 12.9 18.0 P ERa tio 1956-7 High Current 30.8 17.9 16.2 10.8 23.5 14.9 10.4 8.8 It will be seen that a large part of the good performance of the growth stocks stemmed from the fact that the PiE ratio increased from 16.5 in 1946 to 30.8 at the 1956-1957 high. Meanwhile the PiE ratio of the investment-grade group increased relatively little so that most of the rise was due to actual improving earnings rather than a change in investor sentiment. The poor performance of the low-priced group is also explained by the fact that the PiE ratio in 1946 was a ridiculous 18.0 and at the 1956-1957 high was only 10.8. Thus, despite the fact that earnings improved, declining investor sentiment caused very poor price action. ,, ….. It will be seen that except for the growth group, earnings are now being valued con- siderably lower than they were at the 1946 tops. However, in the growth group, the piE ratio still stands at 23.5, considerably above the 16.5 figure of 1946. Thus it is possible that the same type of action may continue. The conclusions of this latest study are not quite so easy to state. There is no doubt but what the buyer of growth stocks had a definite advantage during the 19461956 cycle. Preliminary work shows that this advantage has not continued during the current bear market. While it is not conclusively demonstrated that the former advantage pessessed by the growth equities is entirely absent, the possibility that an entirely different type of stock may be the leader of the next upswing cannot be over- looked. '- EDMUND W. TABELL WALSTON & CO. INC. AWTamb – – – Note The names of the individual issues in the four groups mentioned above will be furnished upon request. Tne following are the stocks mentioned in the Tabell Market Letter of June 20,1958, together with the number of shares which would be owned as of this date, adjusting for all stock dividends, split-ups and capital changes since 1946 GROWTH ISSUES 750 Aluminium, Ltd. 226 Amerada 147 Carrier 350 Corning Glass 389 Dow Chemical 91 DuPont 500 El Paso Nat! Gas 172 Goodrich 135 Intern'l Bus. Mach. 294 Minn. Honeywell 712 Mmn. Mming Mfg. 312 Monsanto 367 National Lead 192 Pfizer 266 Owens Corning Fiber. 263 Radio Corp. of Amer. 87 Rohm & Haas 333 Scott Paper 267 Shell Oil 132 Union Carbide INVESTMENT ISSUES 208 American Can 334 Amer. Cyanamid 91 DuPont 312 General Electric 196 General Foods 417 General Motor s 151 Gulf Oil 196 Johns Manville 86 Kennecott 232 National Dairy 91 Penney,J. C. 286 PhillIps Petrol. 315 Sears Roebuck 260 Socomy Mobil 186 Stand. Oil of Calif. 208 Stand. Oil of Ind. 396 Stand. Oil of N. J. 318 Texas Company 132 Union Carbide 143 Westinghouse Elec. MEDIUM -GRADE ISSUES 84 Allied Stores 172 Allis Chalmers 584 Babcock & Wllcox 204 Blaw Knox 217 Bucyrus Erie 250 Burroughs 125 Chain Belt 294 Clevite 108 Crane Co 178 Distillers Corp 98 Carrier 312 Joy 228 Mead 173 National Gypsum 156 New York Air Brake 561 Penn Dixie Cement 143 Rheem 156 Sylvania 215 Yale & Towne 328 Lowenstein LOW-PRICED ISSUES 277 Amer.Airlmes 32,3 Armour 385 Avco 18 Balt. & Ohio 294 Canada Dry 385 Columbia Gas 505 Emerson Radio 104 Gimbel 200 Intern'l Tel & Tel 125 Loew's 209 Mack Truck 147 N. Y. Central 454 Studebaker Pack. 250 Pan Amer.Air. Exchanged for original investment m Elliott Co. 119 Penn. Railroad 143 Pepsi-Cola 238 Raytheon 294 Rexall 239 Servel 143 Splegel Edmund W. Thlbell Walston & Co. Inc.