Tabell’s Market Letter – February 21, 1975

– – -…– -…- . .— TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08!540 DIVISION OF MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER AMERtCAN STOCK EXCHANGE February 21, 1975 Long-time readers of this letter will be aware that It has, m the pa st, been somewha t crltica I of the large, institutionally-favored growth stocks as investment vehicles and even more critical of the so-called — rie-deCiii6n theory tflat;—fi1tfie early1970-' s7iea.-tOWh-at-we oeffevealooe-excess-iifereUance onthem- —.;.. by many investment managers. In March-April, 1973, we devoted a senes of five letters to examining the impllcatlOns of this concept and trying, as best we could, to refute it. Smce that time a great deal of water has pa ssed under the bridge, and it is perhaps worthwhile to reexamine the growth favorites of a few years ago and make some assessment of their current prospects. The table below shows the price perform- ance of eight representative growth favorites compared to the DnA from theIr 1973 high to their low of 1974 and from that 1974 low through this week. 1973 HIgh 1974 Low Change 2/19/75 Change DnA 1067 573 – 46.3 736 28.5 Avon Products 140 19 – 86.7 35 89.9 Coca Cola 150 45 – 70.2 75 67.5 Eastman Kodak 152 60 -60.1 85 39.9 IBM 365 150 – 58.S 21S 44.7 McDonalds 77 21 – 72.4 41 94.7 Merck 101 47 – 54.0 73 56.6 Sears, Roebuck 123 41 – 66.3 63 50.9 Xerox 170 49 – 71.2 77 57.6 As far a s these issues' performance during the bear market wa s concerned, our earlier fears were borne out. All eight issues declined by a greater percentage than did the Dow, and, in some cases, that decline was 1 1/2 to almost 2 times as great. However, that relatively inferior performance picture has changed dramatically since last fall's bottom, and the eight Issues involved have been leaders on the up- ,sldec,aILoLtheJlJhaYing.movd-ilheac!Jl.y. more,than the Dow and some a period when the Dow was up only 2S–'Thls price improvement' has having come cl coincided with ose ups itdoe dborueb. jlki nogu tds ufrri norgn; fairly impressive base formations which, although they do not suggest anything like a return to the 1973 highs, do suggest somewhat higher prices over the intermediate term. It IS when we go beyond price that the comparison becomes interesting. The table below shows the price/earning;ratio and its ratio to the Dow-Jones pie for the three dates m question. PiE Ratio to PiE Ratio to PIE 1973 Hi DnA PiE 1974 Low DJIA PiE 2/19175 RatlO to Dill PiE DJIA 15.9 5.S 7.4 Avon Products 64.S 4.1 9.7 1. 7 IS.3 Coca-Cola 47.0 3.0 12.9 2.2 21.7 Eastman Kodak 44.S 2.S 16.S 2.9 23.5 IBM McDonald's 41.4 S1.S 2.6 5.1 12.1 12.9 2.1 2.2 17.5 25.1 3.4 Merck 51.0 3.2 16.7 2.9 26.2 3.5 Sears, Roebuck 34.6 2.2 9.6 1.7 14.5 1.9 Xerox 53.S 3.4 11. 7 2.0 lS.5 2.5 As can be seen, at its 1973 high, the Dow was selling for 15.9 times earnings and the growth stocks were selling at premiums from anywhere from two to five times the Dow's PiE. These premiums, as the table shows, completely disappeared in the bear market, and, with a single exception, the ratio of the growth stocks' pie to that of the Dow was lower at the 1974 lows than it had been at the 1973 hIgh, des- pite the fact that the Dow multiple had declined to 5.8. This erosion of premiums explains a good part of …, –thehugeJprice declines forthe growth,lssues. iff T , ; 7' – – .. …. What is interesting, however, is that, at recent prices, the premiums of early 1973 had just about re- turned. The only exceptions are Avon Products and Xerox, which are still considerably lower in relation to the Dow than they were in 1973. All of the other stocks now have premiums over the Dow just about as great a s they enjoyed at their 1973 highs. None of this is intended to suggest lower prices for the growth issues and, indeed, as noted above, technical work suggests somewhat higher levels. It does, however, suggest that future appreciation for these issues is going to have to come largely from Improvement in the earnings muillpies the market is willing to accord the average rather than an increased premium for growth stocks in relation to the average. NOTE The above comments are based on technical factors. Further mformation on all issues is available on request. Dow-Jones Industrials (1200 p. m. 1 S & P Compo (\200 p. m.l ANTHONY W. TABELL DELAFIELD, HARVEY TABELL Cumulative Index (2/20/75) 457.97 AWT/jb No statement ar ellpreSIOn of opln'on Of any other matter herein contained IS, or ,s to be deemed to be, directly or indirectly, on offer or the saficltallon of an offer to bvy or sell any security referred to or mentioned The mal1er IS presented merely for the Convefllenc(; of the subscr,ber While -Ne believe the sources of our Informa- tion to be rel,able, we In no woy represent or guarantee the accuracy thereof nor of the stotements mude herein Any action to be token by the subscriber should be based on hiS own Invesllgotlon and ,formation Janney Montgomery Scott, Inc, as a corporollon, and ,ts officers or employees, may now hove, or may later take, posilions or lrades In respect to ony secuntles mentioned In thiS or any future Issue, and such position may be different from any v,ews now or hereafter ellpressed In thiS or any other Issue Janney Montgomery Scott, Inc, which IS registered With the SEC as an Investment OdVISor, may give adVice to Its Investment adVISOry and othe, customers Independently of any stotements mode In thiS or In any other Issue Further Information on cny security mentioned herein IS available on request