Tabell’s Market Letter – March 16, 1973

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIVISION OF MEMBER NEW YORK STOCK E)(CHANOe, INC MEMBER AMERICAN STOCK EXCHANGE \ March 16, 1973 – – – – –,.. ….,.,.- ..r ' .–,- – -'. -,'';' -.- – .-…. — ….. – .;;-, -, – We noted last week that the advocate of growth stock investment could produce a highly impressive record of results over the past two decades. An investor of 15,000 in IBM in 1949 would be a millionaire today, and the investor who placed a like amount in Xerox in 1958 would now be worth 3 million. It is difficult to argue with such numbers. Yet it is perhaps worthwhile to take a hard look at the record, using as an example the most immaculate of vestal virgins (as one analyst called growth favorites this week), International Business Machines. Compo Annual Compo Annual Price Change Growth Rate Earnings Change Growth Rate 1949 6.25 .33 1961 150 1564 26.5 1.96 494 16.0 1972 400 167 9.4 11.03 462 17.0 The table above compares IBM's price and its earnings for three years, 1949, 1961, and 1972. What is worthy of note is the compound annual growth rate of earnings. It was better for the period 1961-1972 than for 1949-1961. Yet, for the first period,IBM increased 1564 at a compound annual rate of over 26, whereas since 1961 it has appreciated at an above-average but hardly astonishing rate, 9.4. I. B. M. D J. I. A. . Ratio Price Earnings P/E Price Earnings P/E of P/E s 1949 1961 6.25 150 .33 1.96 I18.9 76.5 200.13 731.14 23.54 31.91 8.5 22.9 2.22 3.34 1972 400 11.03 36.2 1020.02 65.00 15.7 2.30 .estaUstics..,abovedocumenLsomeof.1herea-sons.forthis performanGe-d-ispar-i-ty-.-I-n-4-94-9,..IBMwas— -.- selling for 18.9 times earnings, and the Dow-Jones Industrial Average was selling at 8.5 times. Thus, IBM's multiple was 2.22 times that of the Dow. By 1961 the Dow multiple had almost tripled, to 22.9, and IBM, by then everyone's darling, was selling at 3.34 times the Dow multiple, producing a pie ratio of 76.5. Since that time the market forces have been working in the 'opposite direction. The Dow pie has declined to 15.7 and IBM has retreated to almost the same multiple in relation to the Dow that it had in 1949. POINTS CHANGE DUE TO I 949 196 1 196 I 19 72 Earnings Change 30.75 694 Improvement in DJIA PiE ChangeIBMP/EasofDowP/E Total Points Gain 62.75 50.25 143.75 – 266 -178 250 If we break the price changes for IBM over the two periods into those due to earnings growth, changes due to a shift in the Dow p/e, and changes due to shifts in IBM's pie relative to that of the Dow, some interesting numbers emerge. Only 30 pOints of IBM of the 143 point gain from 1949 to 1961 was due to earnings improvement and, had it not been for the other factors, the stock would have sold at 37 not 150. Almost half the 1949-61 gain came from a change in the general-market price/earnings ratio and more than a third from a change in IBM's relative position. By contrast, for the 1961-72 period, had IBM retained its 1961 multiple, it would have tacked on 694 pOints to sell for 844. However, the drop in the Dow knocked off 266 pOints of this gain and the change in relative position another 178 pomts thus making the total gain only 250 points. The only point that these figures underscore is that the truly spectacular gains in growth stock invest- c-ment come from purchase early-in the growth curve—not later. IBM,'in 1949, it will be recalled;-had—-' yet to produce its first computer and in 1958 Xerox was a tiny over-the-counter company with a few pat- ents on a largely untested process. By the time the growth process is finally recognized and companies achieve the size of IBM, now a 9 billion operation, it becomes less and less logical to project the growth curve infinitely into the future, and thus a logical process of multiple erosion occurs. There is moreover scant eVIdence that the process of general erosion of multlples, as shown by the decline of the Dow pie since 1961,is not a continuing process. With this factor working against the investor,rather than in his favor as it did over the 1961-71 period, it becomes all the more important to select stocks early on the growth curve. This, however, is a process which pos es problems, some of which we hope to discuss next week. Dow-Jones Industrial (1200 p.m.) 966.44 S & P (1200 p.m.) 113.96 AWTrk ANTHONY W. TAB ELL DELAFIELD, HARVEY, TABELL No statement or exprenlon of Opinion or any otner motter herein contolned IS, or IS to be deemed 10 be, directly or ,nd,rectly. on offer or the SOIIC.lollon of on offer 10 buy or sell ony seCUriTy referred to or mentIoned The molter IS presented merely for the converlenclS of the subcrlber While we believe the sources of our Informa lion to be reliable, we Ifl flO way repreent or guarantee the accuracy thereof nor of the statemefl!S mode herem Afly action to be laken by the subSCriber should be based Ofl hiS OWfl InvestlgollOfl cmd InformatIOn Janney Monlgomery Scott, Inc, as a corporation, and Its officers or employces, may now have, or may latcr lake, positions or lrades m respect to any secufltles menlloned In thiS or any future Issue, and such pOSition may be dIfferent from any views now or hereafter epresscd In Ihls or any other Issue Janney Montgomery cott, Inc, which IS registered With the SEC as on Investment adVisor, may give odvlce to Its IIwestment adVISOry and other customers mdependefllly of any statements mode Ifl Ihls or m any other Issue Further mformorlon Ofl any security mentioned herein s available on request