Tabell’s Market Letter – January 12, 1962

&-Walston Co. Inc. Mem.bers New Y01-k Stock Exchange NEW YORK SAN FRANCISCO LOS ANGELES PHILADELPHIA CKiCAGO OFFICES COAST TO COAST AND OVERSEAS TABELL'S MARKET LETTER January 12, 1962 From a technical viewpoint, the Dow-Jones Industrial average reached its mini- mum downside objective at Monday's intra-day low of 698.42. The minor top formed in November-December at the 735 level indicated a decline to 700-695. There is, however, a broader top formation around the 730 level that was formed from August to Lecember. This technical pattern has a downside potential of 650-635. This is the maximum downsid indication shown by our technical work at the moment. The action of our breadth index should furnish an important clue to nearer term price action. This index, which has been acting worse than the market since May, also clined with'the averages -during the ,but September-low. A. decline below that level'would indicate the probability of 650-635 in the Industrial average Ability of the breadth index to hold above the September low and move above the l\Tovembe high would be encouraging. Continuing the discussion started in last week's letter relative to a possible re- turn to 1956 price valuations, it is interesting to apply this formula to the thirty individu issues comprising the Industrial average as well as the average itself. Last week we stated that the Industrial average was selling at an historically high price/earnings ratio even if cash flow were used rather than straight earnings. In 1956, the Industrial average sold at a ratio of 8. 9 to 10. 0 times cash earnings as compared to 10. 7 to 13. 0 times cas flow in 1961. Allowing for a rise to 65 cash flow in 1962 compared to 57 in 1961, and applying 1956 ratios, would result in a price range of 650-575 for 1962. However, if this same formula is applied to the thirty individual issues in the In dustrial average, some very diverse results occur. This is largely due to the changes in investment popularity of each issue in the past five trends. For example, American Tobacco was a rather st y the relative growth sR-e issue in 1f.56. At a high of 42 and a low of 34, it yielded 5. 9 to 7. 4 S O. t 4 times cash flow of 4.04 a share. In recent years, the issue has b c e m c re popular investment wise. The tobaccos are one of the groups c ifi s consistent growth issue accOrding to one r enti 0 sell'anrigher piE-ratios. Th question is whether this trend has b e a t ggerated. At the recent high of 111 /, American Tobacco was Applying 1956 ratios ld r a cash flow for 1962 and yielding 2. between 58 and 46 against today's clos of 991/2. We do no a acco stocks are going to return to 1956 valuation when they were r hey appear to be amply valued at the moment. -Techni cally, most of the t a e reached upside objectives. On the other side of the pictu is Aluminum Co. of A ca. This was an extremely popular issue in the early 1950's an advanced from a 19 ow of 13 to a 1956 high of over 130 in 1956. Earnings, which had shown a very nice growth trend, started to decline in 1956 and the stock reached a low of 60 in 1958, rallied back to 115 in 1959 and sold as low as 56 1/4 in 1961. Cash flow has dropped from 6.71 in 1956 to an estimated 5.75 in 1962. Applying the 1956 formula would result in a price range of 119-73 as against today's price of 62. Here again, we do not imply a return to 1956 valuations which were extremely high. However, Alcoa has probably discounted most unfavorable developments and does not appear too vulnerable. Technically, the aluminum issues are close to downside objectives. Other stocks in the Dow-Jones Industrial average that appear high when a 1956 valuation of current cash flow is used include General Foods with a 41-37 figure as against a 1961 high of 1073/4 and t0daY's price of 921/4, Procter & Gamble with a 47- 37 figure as against a 1961 high of 1011'12 and price of 86 1/2, and Sears Roe- buck with a 50-39 figure as against a 1961 high of 94 3/4 and today's price of 80 1/8. The steels still appear a bit high based on a 1956 valuation. Bethlehem Steel (41 7/8) has a 39-32 figure, and U. S. Steel (765/8) a valuation of 62-44. Yet, many of the thirty stocks appear tobemodestly priced when 1956 valuations are used. They include Allied Chemical (54 7/8) with a figure of 71-50, duPont (232) with a figure of 300-220, General Electric (71) valued at 75-65, International Paper (34 3/4) valued at 44-31, Standard Oil of New Jersey (51) with a prOjected range of 59-46, and Union Carbide (119 1/4) with a figure of 164-130. Swift & Co. ,(45 1/8), moreover, is considerably below its 1956 valuation.of 63-56. EDMUND W. TABELL 18 to he construed 88, an offer to sell or a I b ur y RC!!U1J les rtferred to hClem The lnfOrmatlO1l …….c'tfnULinMi as tt'l'ccu'laty or completeness and the thereof 15 not. and under no CIrcumstances UI to be construed as, II, representa- bon by Walo;ton & Co, Inc. All of opmion arc subJect to change Without nObce Walston & Co, Inc. and Offlcers, Dircctors. Stockholders and thereof. TlUrchuse, eel! and may have an interest in the securities mentioned herein ThIS market letter IS intended and prC'lentcd merely as II. general. informal commentary on day to day market news and not as a complete analysis Additional mforrnatlOn With respect to any referred to herem Will be –turmshed upon – r e-q- u e– s- t .-'——— — — – – — \\ N .301