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By Root 2784 0

shares advanced from 3/8 to 68, and then fell back to 3.2 In the dividend record column he will find one that goes back to 1791—paid by Industrial National Bank of Rhode Island (which recently saw fit to change its ancient corporate name).* If he looks at the Guide for the year-end 1969 he will read that Penn Central Co. (as successor to Pennsylvania Railroad) has been paying dividends steadily since 1848; alas!, it was doomed to bankruptcy a few months later. He will find a company selling at only 2 times its last reported earnings, and another selling at 99 times such earnings.3 In most cases he will find it difficult to tell the line of business from the corporate name; for one U.S. Steel there will be three called such things as ITI Corp. (bakery stuff) or Santa Fe Industries (mainly the large railroad). He can feast on an extraordinary variety of price histories, dividend and earnings histories, financial positions, capitalization setups, and what not. Backward-leaning conservatism, run-of-the-mine featureless companies, the most peculiar combinations of “principal business,” all kinds of Wall Street gadgets and widgets—they are all there, waiting to be browsed over, or studied with a serious objective.

The Guides give in separate columns the current dividend yields and price/earnings ratios, based on latest 12-month figures, wherever applicable. It is this last item that puts us on the track of our exercise in common-stock selection.

A Winnowing of the Stock Guide

Suppose we look for a simple prima facie indication that a stock is cheap. The first such clue that comes to mind is a low price in relation to recent earnings. Let’s make a preliminary list of stocks that sold at a multiple of nine or less at the end of 1970. That datum is conveniently provided in the last column of the even-numbered pages. For an illustrative sample we shall take the first 20 such low-multiplier stocks; they begin with the sixth issue listed, Aberdeen Mfg. Co., which closed the year at 10¼, or 9 times its reported earnings of $1.25 per share for the 12 months ended September 1970. The twentieth such issue is American Maize Products, which closed at 9½, also with a multiplier of 9.

The group may have seemed mediocre, with 10 issues selling below $10 per share. (This fact is not truly important; it would probably—not necessarily—warn defensive investors against such a list, but the inference for enterprising investors might be favorable on balance.)* Before making a further scrutiny let us calculate some numbers. Our list represents about one in ten of the first 200 issues looked at. On that basis the Guide should yield, say, 450 issues selling at multipliers under 10. This would make a goodly number of candidates for further selectivity.

So let us apply to our list some additional criteria, rather similar to those we suggested for the defensive investor, but not so severe. We suggest the following:

Financial condition: (a) Current assets at least 1½ times current liabilities, and (b) debt not more than 110% of net current assets (for industrial companies).

Earnings stability: No deficit in the last five years covered in the Stock Guide.

Dividend record: Some current dividend.

Earnings growth: Last year’s earnings more than those of 1966.

Price: Less than 120% net tangible assets.

The earnings figures in the Guide were generally for those ending September 30, 1970, and thus do not include what may be a bad quarter at the end of that year. But an intelligent investor can’t ask for the moon—at least not to start with. Note also that we set no lower limit on the size of the enterprise. Small companies may afford enough safety if bought carefully and on a group basis.

When we have applied the five additional criteria our list of 20 candidates is reduced to only five. Let us continue our search until the first 450 issues in the Guide have yielded us a little “portfolio” of 15 stocks meeting our six requirements. (They are set forth in Table 15–1, together with some relevant data.) The group, of course, is presented for illustration