Tabell’s Market Letter – March 01, 1991

Tabell’s Market Letter – March 01, 1991

Tabell's Market Letter - March 01, 1991
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TABELL'S MARKET LETTER 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (609) 987-2300 March I, \ 991 The central theme of this letter in recent weeks has been the expectation of higher prices coupled with the.caveat\hatthose .pl'ices.mayweU. not. wind .up. being. all. that. much . higher. .One. ., r. reason for the latter reservation centers around valuation. It has been pointed out by many analysts that equity valuations are, overall. not excessive. For the market averages. these valuations are now in the vicinity of their historic mid -point rather than at the high levels which have tended to characterize market tops. This statement is, however, less true for a group of issues that we have come to term the usual suspects, stocks that have led the market for most of the past decade. Consider the following table whiCh gives some relevant stati.tics for typical examples of this genre. As can be seen, current price-earnings ratios are, in some cases at least, approaching their 1987 peak levels. Sep 1987 1990 1982 Low 19B7 High Earnings PIE Recent HIgh Earnings PIE Coca Cola 5 26 1.35 19.2 54 Merck 11 15 2.10 35.1 104 Philip Morris 51/2 31 1.80 17.2 69 Procter & Gamble 20 52 2.50 20.8 91 Wal-l1art stores 1 1/4 21 SO 42.0 38 2.04 26.4 4.56 22.B 3.83 18.0 4.85 18.8 1.143 3 The five issues in the table all have certain other similarities. They are up sharply from their 1982 lows, 1255 as a group versus 286 for the Dow. Earnings have continued to expand from 1987's third quarter, used to calculate their P/F1s at that years high. Indeed those earnings have approximately doubled. For these issue., the 1987 bear market was only part of a temporary interruption. They were, indeed down sharply in that market. However, all five quickly recovered their losses and, at recent peaks, were, as a group, 85 above 1987 highs. Companies such as .these can be said to be examples of Wall Streefs preoccupation with excellence. Indeed, one of the companies above (Merck) has, for five years, been cited by .—!'ortu ne .,,-s America's most Jldmireg .comp!lny .Fo.rth.emos Lpar.t,thisis .n..periec tlylogical – – – – I phenomenon Looking at the long-term earnings history of any of the five, one sees virtually uninterrupted growth stretching back to the 1950's, often with only one or two down quarters. There can be little doubt that they deserve SUbstantial market premiums. Market premiums, however,\are not without risk. Those of us who have been around for a while remember the premium multiples commanded by a group of companies known, in the early 1970's, as the nifty fifty. Set out below' are figures for five stocks in this group. 1962 Low 1973 Hi Earnings PIE 1981 Hi Earnings PIE Recent High Avon Products 11 Eastman Kodak 10 I B fit 15 Merck 15/8 Xerox 51/2 140 67 90 16 110 2.40 1.50 2.30 ,33 3.10 58.3 44.7 39.1 48.5 54.8 72 44 73 17 73 7.00 3.40 6.25 1.00 7.50 10.3 12.9 11.7 17.0 9.7 42 47 140 104 S9 The history of these companies through the early 1970's is the same as that of the five above through the early 1990's. Their price appreciation, fueled by spectacular earnings growth from 1962 to 1973, was outstanding. At their 1973 highs, they commanded premium mUltiple., multiples which make today's look fairly conservative. Between 1962 and 1973, they managed to go through a couple of bear markets which produced only insignificant downward blips on their charts. However, as we all now know, the post-1973 performance for many of these stocks turned out to be rather dismal. The interesting thing is that earnings progress continued for another nine years after 1973, as a comparison of their 1973 and 1981 earnings in the table will show. Over those nine years the five companies increased their earnings by 167, yet four of the five were, at their 1981 high, considerably lower than they had been in 1973, and three remain lower today. Thus, one of the justifications for technical analysis. What happened between 1973 and 1981 was not fundamental weakness, but simple erosion of investor confidence—the unWillingness to continue to pay extreme premium multiples. After 1981, fundamental problems of one sort of another did set in for four of the five, the exception being Merck, which is why it finds itself in both groups cited above. It is doubtful, though, that the market anticipated this only a decade in advance. None of the above is meant, in any way, to be a prediction. Indeed, one characteristic of both groups is that they endured a number of bear markets with no erosion of their premiums. As 1973 shows, however, premiums are not without risk. ANTHONY W. TAB ELL DELAFIELD, HARVEY, 'CABELL INC. Dow Jones Industrials (12 00) S & P 500 (12 00) Cumulative Index (2/28/91) AWTjb 2894.06 364.03 5604.43 No statement or expression of opln!on or any other mailer herem contamed IS, or IS to be deemed to be, directly or mdlrectly. an offer orthe solicrtatlon 01 an offerlo buy or sell any security referred 10 or menlloned The matter IS presented merely for the convenience of the subSCriber While we believe Ihe sources of our Information to be reliable, we In no way represent or guarantee the accuracy thereof nor 01 the statements made herem Any action to be taken by the subSCriber should be based on hiS own InvestlgaliOn and Information Delafield, Harvey, Tabelllnc, as a corporation and Its officers or employees, may now have, or may later take, posrtlons or trades In respect to any securities mentioned In thiS or any future Issue, and such pOSition may be different from any views now or hereafter expressed In thiS or any other Issue Oelafleld, Harvey, Tabellinc , which IS registered With the SEC as an Investment adVISor, may gIVe adVice 10 rts Investment adVISOry and other customers Independently of any S1atements made In thIS or In any other Issue Further Information on any secunty men\loned herem IS available on request

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