Tabell’s Market Letter – April 04, 1985

TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 9249660 April 4, 1985 After 30 years of observing the stock market, it is difficult to find market behavior that does – – not produce-at71east some sense—of ded-vu;-and -the presenr case IS no exception-.-A -marKet being led – on the upside by stable. defensive groups such as Foods, Tobaccos, and Utilities is, of course, according to modern portfolIo theory. not supposed to happen. since excess reward is, theoretically, obtaInable only by assuming excess risk. Such leadership has emerged over the past four years, however. and, as veteran observers are aware. the phenomenon is not new, having similarly occurred back in the dark ages of the late 1950's. The followmg table shows the approximate price moves, low to high, of four typical stocks and the S & P 500 for the periods 1957-1961 and 1980-1985. Adjustments are made to reflect 1961 and 1985 capitalizations in the respective cases. Coca Cola FPL Group General Foods Reynolds Ind. S & P 500 1957 Low 32 22 20 13 38.98 1961 High 108 88 108 89 72.64 Change 238 300 440 584 86 1980 Low 29 10 24 27 98.22 1985 High 70 24 62 87 183.35 Change 141 140 158 222 87 Interestingly enough. the prIce moves for the stocks in question durIng the current period pale in comparison with those of the earlier one. For the two time periods, the change in the S & P 500 was approximately the same. However, in 1957-1961 the moves of the individual stocks — and they were truly representative of their groups at the time — were almost twice as great as those which have been seen to date. The reason, perhaps. is that the earlier rise featured increasing investor confidence In the stocks in question, somethmg which has been largely absent to date. The table below shows the earnings per share for the same stocks at the beginning and at the end of each of the two periods. From these earnings. p Ie ratios, at the low and at the hlgh prices for the move. are calculated. Finally, each price learnin gs- ratio is shown relative -to that-'-of–'-the-S & – p 500 rat the…time-;–a-statistic–8rrivedat-by-di— – viding the individual stock p Ie ratio by the S & P p Ie ratio. Coca Cola FPL Group General Foods Reynolds Ind. S & P 500 1957 EPS. PE Rei PE EPS 2.40 13.3 1.15 3-00 1. 52 14.5 1. 25 2.08 1. 90 10.5 .91 2.85 1. 55 8.4 .72 2.85 3.37 11. 6 3.19 1961 PE Rei PE 36-0 1. 59 42.3 1. 86 37.9 1. 67 31. 2 1. 37 22.7 EPS 3.42 1. 97 4.47 6.23 4.82 1980 PE 8-5 5.1 5.4 4.3 6.6 Rei PE 1. 29 .77 .82 .65 1985-Estimated EPS PE Rei PE 5.55 i2-6 1. 24 2.80 8.6 .84 7.35 8.4 .82 8.50 10.2 1. 00 18.00 10.2 As can be seen, 1957-1961 was a period of markup for stocks in genera!, the pie ratw for the 500 almost doubling. By contrast, in the current case, it has risen only a bit more than 50 and, interestingly. is lower than where it startea in 1957. The multiples for the four stocks also increased between 1980 and 1985 but, by and large, remam modest. The key statistIc is that, for three of the four stocks at least, the relative p Ie ratios have remained approximately the same for the past four years. By contrast, during the 1957-1961 period, the relative multiples for all four of the stocks increased substantially. They did this, furthermore, at a time when the S & P multIple itself was doubling. Thus earnings gains averagIng some 50 over four years produced price appreciation averaging 390. In the current case, earnings rises of about the same magnItude have produced only half as much appreciation. The aftermath of the sort of price exploitation which took place in 1957-1961 should also be noted. Three of the four issues (Coca Cola is the exception) did not agam exceed their 1961 highs until the 1980's. As we read today's fmancial commentary, we are already beginning to see repetitive fundamental rationalization for the moves in defensive issues which have taken place to date. These rationalizations, and they are perfectly valId, include prospects for deflation and, in the case of UtilItles. lower capitalinvestment requirements. It will be Interesting to see whether this reasoning continues to attract Investor notice. possibly resulting in the sort of price markup which took place two-plus decades ago. AWT;rs ANTHONY W. TAB ELL DELAFIELD, HARVEY, TABELL INC. Dow-Jones Industrials (400 p.m.) 1259.05 S & P Composite (4'00 p.m.) 178.42 Cumulative Index (4/3185) 2366.46 No stalOmcnt or eXpresslorl of opinion or any olher matter herein contained IS, or IS to be deemed to be directly or Indirectly an offer or the soliCitation of an offer to buy or sell any security referred to or mentioned The matter 15 presented merely for the convenience of the subscriber While we believe the sources of our information to be reliable, we m no way represent or -guaranteo the accuracy thereof nor of the statements made herem Any acllon to be tah.en by the subSCriber should be based on his own inVestigation and information Delafield, Harvey, Tabell Inc, as a corporation and Its ofllcers or employees, may now have or may laler lake poSitions or hades In respect to any secuntres mentioned In thiS or any future Issue, and such pOSItion may be dllferent from any views now or hereafter epressed In thiS or any 01 her Issue Delafield Harvey Tabell Inc, which IS registered With the SEC as an Investment adVisor, may glyeadYlce to Its Investment adVIsory and other cuStomers Independently of any statements made In thiS or In any other Issue Further Information on any security men\!oned herein IS available on request