Tabell’s Market Letter – April 24, 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 April 24, 1992 In Febrwuy-March, we published a series of four letters on the 20-year price history of six prime institutional favorites of 1972, ,.. s!Oks Fe..hadseltl9 at)haUiq1ed !lub v.estal..Yigin. Th poir!cofth,,!Cise wI! tat, over twoddesoCa greal uu ……11 I market, the group had actually declined in pnce- TIle letters produCed a fairliheary response, 'some of it, predictably, accusing us of sacrilege. It may, therefore, be of interest to expand on a theme we alluded to briefly in the first of the letters, the exact process by which the six stocks were turned from favorites into outcasts. Purely as an example, let us consider the chart at the left of one of the six favorites-mM. A few features of the chart's rsther ingenious construction need to be noted. The line of connected solid dots traces IBM's earnings per share, and the scale is so constructed that the earnings and price coincide at a pie rstio of exactly 15. Thus the level of the stock's pie can be gauged by the price's distance above the earnings line. Additionally, the thin solid is a relative-strength line, rising when the stock is perfonning better than the S & 1955 to 1961 was of the honeymoon phase of the stock market's romance with Big Blue. Earnings were increasing (and would !!!!li!!!1 to increase through 1964) at rate of 20 per annum. At' 1961 high, the stock sold for what would be its high pie of almost 80 times trailing 12- month earnings. Phase two was a slowdown in earnings growth. The rate from 1964 to 1974 was around 14. The 1961 premium never reappeared and for most of the decade the stock's pie was in the 30's, extending briefly to above 40 at the 1969 high. Note that in terms of relative performance the stock actually reached its high in that year. Thus between 1969 and the January 1973 Ingh, the stock was actually a sub-market performer. Armageddon for IBM and the rest of the nifty fifty started, of course, in January, 1973, and the markdown of the pie from 40 to 13 took the price (adjusted) from 90 to 36. It is interesting to note that earnings growth continued through the third quarter of 1974, a few months after the stock had made its low. The decline apparently was in anticipation of nothing more than flat earnings for a year in 1974-5. For the next decade, to 1984, earnings growth returned to the same 14 rate which had charscterized the latter 1960's. What disappeared, however, was the market's willingness to pay a generous price for those earnings. The proximity of the price and earnings lines for the last twenty years indicates the multiple remained in the region of fifteen. This continued for a decade, although actual earnings decline did not begin until around 1985. What we think all this illustrates is the rather uncanny ability of the market to anticipate. IBM's pie reached its high m i961, four years before the eammgs-growth rate began to slow in 1965. Its high price relative to the S & p occurred in 1969, four years ahead of the 1973-4 break. That break, in tum, was already over by the onset of the flat earnings year. And for ten years, 1974-1984, the market refused to pay an above-average pnce for the stock although earnings were growing at a 14 rate and would not begin to decline until the mid-1980's. Note that when we use the word market here, we are referring to hard, cold numbers–price/eamings ratios, relative strength. the sorts of tlungs quantitative analysts tend to look at. While demonstrable deterioration in these factors was taking place, the public adulahon of one-declslon stocks was soaring to new heights. Also demonstrated, we thInk, IS the importance of investor confidence as a factor, along with standard fundamental data, in detennining stock prices. Technical analysis, of course, IS one velncle through which we may attempt to measure the level of this confidence. ANTHONY W. TABELL. CMT Dow Jones Industrials (1200) 3344.81 DELARELD. HARVEY. TABELL Standard & Poors 500 (1200) 410.61 Cumulallve Index (4/23/92) 7213.97 No slatement or expression of opinion or any other matter herem contained 15 or IS to be deemedto be. directly or indirectly, an offer or the soliCitation of an offerlo buy orsell any security referred to or mentioned The matter IS presented merely for the convenience of the subscriber 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 to be taken by the subscriber should be based on hiS own Investigation and information Delafield, Harvey, Tabellinc , as a corporation and Its officers or employees, may now have, or may later take, posllions or trades In respect to any secun1les mentioned In thiS or any future Issue, and such poSition may be different from any views now or hereafter e)(pressed In thiS or any other Issue Delafield, Harvey Tabelllnc, which IS registered with the SEC as an Iflvestmenl adVisor, may give adVice to ItS Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further information on any security mentioned herein IS available on request