Tabell’s Market Letter – July 28, 1978

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 DIYISION OF MEMBER NEW VORK STOCk eXCHANGE. INC MEMBER AMERICAN STOCK EXCHANGe It is perhaps appropriate at this time to take another look at the Vestal Virgins. These, it will be recalled, are a group of some dozen stocks selected originally in this letter in March, 1973. The selection was made in an attempt to produce a representative list of favorite institutional stocks widely recognized at the time of selection as growth issues. The object of the exercise, at that point, was to suggest that the then-current prices of those issues might be discounting, in the well-known phrase, not only the future but the hereafter. The following table presents some relevant statistics regarding those 12 growth stocks at each year-end from 1966 through 1977. The first column is a geometric average of the year's closing prices of each of the 12 issues, and the second is the similar average of their per-share earnings. The third column is a price/earnings ratio for the growth stocks, followed by the comparable pie for the Standard and Poor's 500. The final column is a ratio of the two price-earnings ratios. YEI\P T900 1967 1968 1969 1970 1971 1972 1973 J 97 II 1975 1976 1977 AVEP,1'\G8 5Q-gs- 47.28 54.78 63.18 58.46 84.27 117.64 82.94 4-4 .1..7 62.08 65.49 55.47 EAPNTNGS 1. 04 1. 16 1. 33 1. 54 1. 75 1. 96 2. 25 2.68 0 3.09 3.64 4.14 P-E —zg–g 40.9 41. 1 41. 1 33.4 43.0 52.2 31.0 1-7.-0 20. 1 18.0 13.4 S&P P-E J4. 5 18.1 18.0 15.9 18,0 17. 9 18.4 12.0 'J-;-/ 11.6 10. 8 8. 7 R.lITTO T.lJ06 2.257 2.278 2.579 1. 859 2.404 2.838 2.592 2-,-205 1,'738 1 . 661 1. 539 We have a few comments on the above numbers, and they will reflect our own bias as a 'market technician. The typical price action of this sort of issue, as exemplified by the first column, is all too well known. Between 1966 and 1972, they advanced almost 300, and in the two subsequent years, lost almost 2/3 of their 1972 value. The recovery since that time has been miniscule and in- ferior to that of thf' general market. There exists no explanation for this action in the earnings history, which has demonstrated, over the period under study, a rather steady growth in excess of 12 compounded annually. The fin- ancial community devotes a great deal of time, effort and money to forecasting earnings growth — an ironic effort since the task is relatively easy and often irrelevant. Its ease is demonstrated by our own selection of these issues five years ago on the rather simple-minded basis that their growth prospects were common knowledge, and its lack of relevance is suggested by the fact that the earnings did indeed grow while the price collapsed. The major determinant of price action has been the fact that investors were willing to pay 52 times earnings for this particular group of growth stocks at the end of 1972 and only 13 times the vastly-improved earnings at the end of last year. This has been partially, but not totally. a general-market phenomenon. The multiple being paid in 1972 was 2.8 times that of the S & P, and, by 1977, this had been reduced to 1.5 times a much reduced market multiple. 20/20 hindsight, of course, tells that 2.8 times was too high. The basic question centers around how looN is low. Is 1. 5 times the general market multiple an appropriate – p r i c e Tfor and is the -muItlple. . . 1n- today's environment The answer to these questions will have at least equal relevance with earnings forecasts insofar as determining price action is concerned. Herewith bias. The only way we know of to determine future levels of investor confidence is by an analysis of technical price action. For this reason, we think that analysis of the technical p3tterns of major high-capitallzation growth issues is of Significance today. It is our intent to present such an analysis in future issues of this letter. — NOTE The 12 stocks in the average above are Avon Products, Burroughs, Coca-Cola, Disney, Eastman Kodak, IBM, Johnson & Johnson, McDonalds Corp., Polaroid, Proctor & Gamble, Sears-Roebuck, and Zerox. Comments are based on technical factors only. DOW-Jones Industrials (1200 p.m.) 849.36 ANTHONY W TABELL S & P Composite (1200 p.m.) 99.45 DELAFIELD, HARVEY, TABELL Cumulative Index (7/27/78) 752.38 No statement or eKpreSSlon of opinion or any other matter herein conlOined IS, or 1 10 be deemed to be, directly or indirectly, on offer or the soliCitation of on offer to buy or sell any secunty referred to or mentioned The matter IS presented merely for the conVef'lenC6 of the subscriber While oNe believe the sources of our mformatlon to be reliable, we 10 no way represent or guarontee the accuracy thereof nor of the statements mude hereIO Any action to be taken by the subSCriber should be based on hiS own mvest,gat,on and information Janney Montgomery Scott, Inc, as a corporation, cnd Its officers or employees, moy now have, or may later toke, posillons or trades In respect to any securities mentioned In thiS o any future Issue, and such pOSition may be different from any views now or hereafter eKpressed m thiS or any other luue Janney Montgomery Sc01l, Inc, which IS reglsered With the SEC as on Investment adVisor, moy give adVice to liS Investment adVISOry and othel customers Independenlly of any statements mode In thiS or In any other Issue Further ,nformot,on on any secur,ty mentioned herelr IS aVailable on request