Tabell’s Market Letter – March 06, 1992

–' TABELLS MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC 1609) 987-2300 r– March 6, 1992 In last week's leeter. we recalled a plece we had wnllen twenty years ago, at wille hme we selected ')IX favored growtl! fSsues of the day. II turned out fhar, after twenty years, jive of the su were down In pnce. We then dIScovered thar our twenty-year-old letter made equal sense today. M'GI new same–jollmvs lieJo'7S a repnnlo/ that letleihlhe-text -v-j;tU;iiVtclianged. -Ob-vioiiSly-;-w;Jla–Ve Picked SLX stocks,Usl;i,however, exactly tlie en/ena we used En 1972, a record of steady growth and universal insntutwnal approbatwn. 71,e three tables are ,denneal, subsn/unng the data for the new stocks and, of course, new (but comparable) dates for pnces and earmngs. TIle result IS as follows. Suppose an investor, at the end of September, 1990, had decided to construct himself a portfolio conslstmg of six wldelyrecognized growth stocks, Coca-Cola, Home Depot, Merck, Microsoft, Philip Morris, and Wal-Mart Stores He would have every reason to be pleased with his investment results to date. His portfolio value would be up 129, the first three columns of the table below showing the details, KO HD MRK MSFT MO WMT Price 9128/90 39 20 76 42 45 27 Current Price 80 63 151 123 75 53 Advance 105 215 99 193 67 96 Erngs 9/28190 1.94 084 435 1.74 443 1.10 Erngs YE 1991 243 1 20 5049 303 464 lAO Change 25 43 26 74 5 27 ThecI1.!claLquestion is …,.JVhy .d. !lnfQately.most lllvt9withsifi!.iJar P9olios woul'!. t'!.!l!nr, po41ti c about the merits of growth stocks. As the table indicates, however, market gains ranging from 53 to 215 were achieved on eammgs gains rangmg from 5 to (in one case) 74 The bulk of the portfolio gain was achieved, not through earnings growth, but through the normal bull-market process of marking up the price paid for a dollar of earmngs, Current Price Earnmgs 1991 That this process has advanced to a faIrly PIE Peak PIE 1987 mature stage is suggested by the table at left which KO 80 HD 63 2043, 1 20 33 21 compares the current pie raho of each stock to its peak pie ratio for 1987 As can be seen, three of 53 36 the six stocks are above that peak. The MRK 151 5049 28 40 implication, of course, is that further gains based on the market's willingness to pay a higher price MSFT 123 3.03 41 61 for earnings may be limited, MO 75 4,64 16 17 The table below takes 1992 estimated earnings for each of the six stocks, applies the WMT 53 lAO 38 34 highest multiple from the left-band table and indicates the price at whicb each stock would sell based on that mUltiple, As can be seen, the percentage advances from current levels on this basis are, in four of six cases at least, rather lilOlted Now it should be made clear what the above study is mtended to do. Most importantly, it is not intended to Price Eng. 1992-E Peak PIE Pot. FIx Chg make any judgment, pro or con, as to the current KO investment ments of the six companies. It IS also not meant to suggest that the target prices mentioned in the last HD 80 63 287 33 95 18 152 53 81 28 taole posses any practtcal value as the market makes new MRK 151 6.47 40 259 71 highs in a bull move, Le., that the purpose of bull markets is to discount rosy futures. It is also meant to suggest that, MSFT 123 402 61 245 99 in the case of such easily-selectable Issues as the ones above, tbe process of discounting may be reasonably well advanced. The investor's dilemma at this point is that MO WMT 75 53 5,57 17 95 26 1 72 38 65 23 further substantial multiple plays can probably be found only by recourse to less conventional stocks. Such recourse, quite obviously. entaIls the acceptance of a higher degree of risk ANTHONY W TABELL, CMT Dow Jones Industrials (1200) 3237.48 DELAflELD,HARVEY,TABELL Standard & Poors 500 (1200) 405,91 Cumulative Index (3/5192) 7363.19 No statement or expression of opmlon or any other matter herein contained IS, or IS to be deemed to be, directly or Indirectly, an offer orthe soliCitatIOn of an offer to buyor sen any secUrity referred 10 or menlloned The matter IS presented merely for the convemence of the subscnber While we beheve the sources of our InformatIOn to be rehable, we In no way represent or guarantee the accuracy thereof nor of the statements made hereIn Any action 10 be laken by the subscriber should be based on hiS own Investigation and Information Oelafield, Harvey, labelllnc, as a corporation and lis officers or employees, may now have, or may later take, poSitions or trades m respecllo any secufll18S mentioned In thIS or any future Issue, and such position may be dlfferen/ (rom any Views now or hereafter expressed In ttus or any o/her Issue Delafield, Harvey, Tabell fnc ,which IS registered with the SEC as an Inveslment adVisor, may glVe adVice 10 Its Investment adVISOry and other customers Independently 01 any statements made In Ihls or In any oher Issue Further Information on any secuTity mentioned herein IS available on request