Tabell’s Market Letter – March 13, 1992

TABELL'S MARKET LETTER 5 VAUGHN DRIVE, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC (609) 987-2300 March 13, 1992 Two weeks ago in this space we recalled an essay which had appeared over a thousand issues of this letter ago, in April, 1972. At tht tiJ1le seJt sixti!ional gI'9wth fVOritesLOf the day. a g1!pwhich wecnntinUl.dt('Lfol1owRntLwhich,some timeJatr. … we dubbed Vestal Virgins, cribbing that name from someone, probably Alan Abelson. The general conclusion of the piece was that the six issues in question were more or less richly priced and that much of their advance over the prior 18 months, which had been substantial, In was due to the market's marking up of their prices reviewing that letter 20 years later, we discovered rather,th-an-a-ct-ua-l e-ar-nings -gro-wth. —————–, that, of these six stocks, all respected favorites of professional money managers in the early 1970's, five had, over two decades, actually declined in price. Then, last week, we came upon another interesting phenomenon. We discovered that, by choosing six new stocks, using the same criterion-institutional popularity–we had used 20 years before, we could virtually duplicate the letter of 1972, leveling the same criticisms that we VESTAL VIRGINS llli Avon Products Coca-Cola Eastman Kodak Home Depot IBM Merck Polaroid Microsoft had at that time. It now becomes necessary to ask the obvious Sears Roebuck Philip Morris question. Is the market msking the same mistake it made 20 Xerox Wal-Mart Stores years ago Now history does repeat itself but the repetition is seldom all that simple and there are, we think, a few differences between the way the market is treating today's vestal virgins and the way it treated, in the late 1960's and early 1970's, the six issues which have now achieved a somewhat frumpy middle age. In looking at the price/earnings ratios for the current favorites last week, we noted that they ranged between 53 and 16, with an average multiple of 35. In April, 1972, the six earlier darlings of the mvestment community were carrying pIe's between 32 and 72, with a mean of 52. Clearly the current outbreak of growth-stock mania is a less violent manifestation. .- – B a s e d purely-on-rccollection,-we-have a-.imilarimpression of today's markct-climatevis-a-vis-that-of-the-1970'3Back then;—- .- learned articles were being published about the One-Decision theory of equity investment, which held that stocks needed only to be bought and never sold. (We suggested, at the time, that money managers subscribing to the theory should halve their fees, an idea which never caught on). It is our impression that no similar mystique exists at present. Today's managers, it seems to us, may justify their holdings of growth stocks based on projections into the future of past impeccable records, but they seem, at least, to worry a little bit about the prices being paid, rather then exhibiting the blithe unconcern about those prices typical of the 1970's. Ultimately, the event that did in the old-time growth favorites was the sudden emergence of their vulnerability to the business cycle. To the absolute horror of most investors, the earnings for most of them actually declined in the 1974 recession. The result of this was not only price collapse in the 1973-74 bear market, but a subsequent failure ever to regain the luster they had once possessed. When earnings for the six–for widely varying reasons–turned erratic during the 1980's, the situation was further exacerbated. The result is the fact that the group is today selling for less than it did two decades ago. In contrast to this, it must be noted that the six current favorites have, by and large, gone through the recession of the early 1990's with flying colors, posting continual quarter-to-quarter earnings gains in the face of a weak economy. For as long as they can continue this performance, it is likely that investor confidence in them will remain at its current high level. Should any of them tum out to be vulnerable to external economic forces, it could be subject to the same sort of debacle that finally afflicted the vestal virgins of 1972. For ourselves, we retain the belief that we had 20 years ago-the conviction that investing is more complicated than finding issues whose earnings have been rising for ten years and huying them on the theory that they are thus likely to rise for another ten. The real challenge in growth-stock investing, we continue to feel, occurs in identifying such issues at an early stage rather than a later one. Of the six current favorites, Coca-Cola, Merck, and Philip Morris have, admittedly, been around for sometime. Wai-Mart, though, was not listed on the NYSE until 1972. Home Depot had its initial public offering in 1981, and Microsoft went public only six years ago, in March, 1986. It is easy to recognize today that these companies possess admirable records. It was less easy when they were a -good deal smaller. . — – –. – – – We concluded a series of letters on growth stocks in 1973 with a quotation, as follows. Selectivity took on a new character by reason of the overshadowing emphasis placed on expected future growth as the prime criterion of an attractive investment. There was nothing wrong with these… ideas, except that it was almost impossible not to carry them too far. With encouragement from the past and a rosy prospect in the future, the buyers of 'growth stocks' were certain to lose their sense of proportion and to pay excessive prices. We think it is a valid point today, although we first used the quote in 1973, and it comes from Benjamin Graham, wnting in 1951 about 1928-29. Citing another ancient sage, we went on to note that Bernard Baruch had once remarked that, in times of market optimism, it is useful to keep repeating to oneself that two and two make four. It will not, we think, be unhelpful to keep this advice in mind during the 1990's. ANlHONY W. TABELL, CMT Dow Jones Industrials (1200) 3219.14 DELAAELD,HARVEY,TABELL Standard & Poor's SOO (1200) 404.64 Cumulative Index (3/12192) 7332.23 No statement or expression of opInion or any other matter herem contained IS, or 15 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 IS presented merely for the convenience 01 the subsCriber While we believe the sources of our information to be reliable, we In no way represent or guarantee the accuracy thereof nor of the statements made herein Any action to be taken by the subSCriber should be based on hiS own investigation and Information Delafield, HaNey, Tabel1 Inc. as a corporahon and Its officers or employees, may now have, or may later take, positions or trades In respecllo any seCUrities mentioned In thiS or any futum Issue, and such pOSition may be different from any views now or hereafter expressed In this or any other Issue Delafield, HaNey, Tabe!! 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