The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [189]
The earnings developments in Whiting are rather characteristic of our business concerns. The figures show steady and rather spectacular growth from 41 cents a share in 1960 to $3.63 in 1968. But they carried no assurance that such growth must continue indefinitely. The subsequent decline to only $1.77 for the 12 months ended January 1971 may have reflected nothing more than the slowing down of the general economy. But the stock price reacted in severe fashion, falling about 60% from its 1968 high (43½) to the close of 1969. Our analysis would indicate that the shares represented a sound and attractive secondary-issue investment—suitable for the enterprising investor as part of a group of such commitments.
SEQUEL: Willcox & Gibbs showed a small operating loss for 1970. Its price declined drastically to a low of 4½, recovering in typical fashion to 9½ in February 1971. It would be hard to justify that price statistically. Whiting had a relatively small decline, to 16 3/4 in 1970. (At that price it was selling at just about the current assets alone available for the shares). Its earnings held at $1.85 per share to July 1971. In early 1971 the price advanced to 24½, which seemed reasonable enough but no longer a “bargain” by our standards.*
General Observations
The issues used in these comparisons were selected with some malice aforethought, and thus they cannot be said to present a random cross-section of the common-stock list. Also they are limited to the industrial section, and the important areas of public utilities, transportation companies, and financial enterprises do not appear. But they vary sufficiently in size, lines of business, and qualitative and quantitative aspects to convey a fair idea of the choices confronting an investor in common stocks.
The relationship between price and indicated value has also differed greatly from one case to another. For the most part the companies with better growth records and higher profitability have sold at higher multipliers of current earnings—which is logical enough in general. Whether the specific differentials in price/earnings ratios are “justified” by the facts—or will be vindicated by future developments—cannot be answered with confidence. On the other hand we do have quite a few instances here in which a worthwhile judgment can be reached. These include virtually all the cases where there has been great market activity in companies of questionable underlying soundness. Such stocks not only were speculative—which means inherently risky—but a good deal of the time they were and are obviously overvalued. Other issues appeared to be worth more than their price, being affected by the opposite sort of market attitude—which we might call “underspeculation”—or by undue pessimism because of a shrinkage in earnings.
TABLE 18-9. Some Price Fluctuations of Sixteen Common Stocks (Adjusted for Stock Splits Through 1970)
In Table 18-9 we provide some data on the price fluctuations of the issues covered in this chapter. Most of them had large declines between 1961 and 1962, as well as from 1969 to 1970. Clearly the investor must be prepared for this type of adverse market movement in future stock markets. In Table 18-10 we show year-to-year fluctuations of McGraw-Hill common stock for the period 1958–1970. It will be noted that in each of the last 13 years the price either advanced or declined over a range of at least three to two from one year to the next. (In the case of National General fluctuations of at least this amplitude both upward and downward were shown in each two-year period.)
TABLE 18-10. Large Year-to-Year Fluctuations of McGraw-Hill, 1958–1971 a
In studying the stock list for the material in this chapter, we were impressed once again by the wide difference