Tabell’s Market Letter – April 14, 1972

Tabell’s Market Letter – April 14, 1972

Tabell's Market Letter - April 14, 1972
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TABELL'S MARKET LETTER — –.——–' 909 STATE ROAD. PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK eXCHANGE, INC MEMBER AMERICAN STOCI( ExCHANGE – ., .' . . -… . , . 0 ;'''c .. -.. ,. …….. —. .' .pril l! 19'!. George J. W. Goodman, in an early novel prior to his incarnation as 'Adam Smith', had oile of nis dha1'- acters utter an immortal piece of stock market advice. To his offspring who had been bragging about his cleverness in amassing a stock-market fortune, a wise old father rejoined, Son, never confuse brains with bull markets There is, unfortunately, a tendency in many segments of the financial community, not only to equate investment sagacity with the normal bull market process, but also to confuse a number of sacred cows such as earnings growth with that process. A hypothetical example will illustrate. Suppose an investor, on June 30, 1970, had decided to construct himself a portfolio consisting of six of the widely-recognized growth stocks, Avon Products, Eastman Kodak, IBM, Polaroid, Sears Roebuck and Xerox. He would have every reason to be pleased with his investment results to date. His portfolio value would be up 96 , the first three columns of the table below showing the details. Price 6/30/70 Current Price Advance Earnings 6/30/70 Earnings 12/31/71 Change AVP 70 124 77 1. 55 1. 89 22 EK 64 120 88 2.50 2.60 4 IBM 250 398 60 8.51 9.38 10 S 56 115 105 2.85 3.56 25 PRD 53 133 151 2.10 1.86 -11 XRX 73 145 99 2.26 2.71 20 The crucial questions is Why, and, unfortunately, most investors with similar portfolios would tend to utter pious declamations about the merits of growth stocks. As the table indicates, however, market gains ranging from 60 to 151 were achieved on earnings gains ranging from -11 to 25. The bulk of the;P0rtf0Ho-gain wasachieved, not-through .earningsgrowh,..but,through .theormal,buJI;mar-e!-cproces s . of marking up the price paid for a dollar of earnings. That this process has advanced to a fairly mature stage is suggested by the table below which com- pares the current p/e ratio of each stock to its peak p/e ratio for the 1968-1969 period. As can be seen, three of the six stocks are above that peak and the others are close. Current Price Earnings 1971 Peak P/E 1968-1969 AVP 124 1. 89 66 63 EK 120 2.60 46 40 IBM 398 9.38 42 47 S 115 3.56 32 26 PRD 133 1. 86 72 76 XRX 145 2.71 54 56 The implication, of course, is that further gains based on the market's willingness to pay a higher price for earnings may be limited. The following table takes 1972 estimated earnings for each of the six stocks, applies the highest multiple from the above table and indicates the price at which each stock would sell based on that multiple. As can be seen, the percentage advances from current levels on this basis are limited. Current Price AVP 124 EK 120 IBM 398 S 115 PRD 133 XRX 145 Est. 1972 Earnings Peak P/E 2.10 66 3.00 46 10.50 47 3.90 32 1. 75 76 3 . 1 0 – 56 Potential Price Change 139 12 138 15 494 24 125 9 133 – . — -174c ,,.– … -20 Now it should be made clear what the above study is not intended to do. Most importantly, it is not intended to make any judgment, pro or con, as to the current investment merits of the six companies. It is also not meant to suggest that the target prices mentioned in the last table posses any practical value for investment purposes. It is meant, rather, to reiterate a fact of which we should all remind ourselves as the market makes new highs in a two-year-old bull move, i. e., that the purpose of bull markets is to .-Jiscount rosy futures. It is also meant to suggest that, in the case of such easily-selectable issues as the ones above, the process of discounting may be reasonably well-advanced. The investor's dilemma at this pOint is that further substantial multiple plays can probably be found only by recourse to less convention- al stocks. Such recourse, quite obviously, entails the acceptance of a higher degree of risk. Dow-Jones Industrial (1200 p.m.) 965.98 SSP (1200 p.m.) 109.88 AWTmn ANTHONY W. TABELL DELAFIELD, HARVEY, TABELL No statement or elCpre55ion of opinion or ony other matter herein contained IS. OT IS to be deemed to be, directly or Ind'fedly. an offer or the soliCitation of on offer to buy or sell ony secUrity referred 10 or menllOf'led The moiler IS prenlcd merely for the convef'ienre of the subscriber Wh,le..e belreve the sources of our information to be rehable, we m no way represent or guarantee the occuracy thereof nor of the statements mode herem Any action fo be token by the subSCriber should be based on hiS own Investigation and informatIon Janney Montgomery Seoll, Inc, as a corporollon, and lis officers or employees, moy now have, or may later lake, posilions or trade In respect to any K'Curllles mentIoned In Ihls or any future ISsue, and such poSlhon may be d,fferent from ally ViewS now or hereafter epressed In this or any other ,ssue Janney Montgomery Seolt, Inc, wh,ch 's registered w,th the SEC 0 on ,nvestment adVisor, moy gIVe adVIce to Its mvestmenl odv,sory and other antamers mdependently af any siotements mode m thIS or in any other ISSue Further mformotlon on any seCUTIty mentioned h-erem 's available on request

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