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If this were the standard behavior of stocks with fluctuating earnings, then making profits in the stock market would be an easy matter. Unfortunately, we could cite many examples of declines in earnings and price which were not followed automatically by a handsome recovery of both. One such was Anaconda Wire and Cable, which had large earnings up to 1956, with a high price of 85 in that year. The earnings then declined irregularly for six years; the price fell to 23½ in 1962, and the following year it was taken over by its parent enterprise (Anaconda Corporation) at the equivalent of only 33.

The many experiences of this type suggest that the investor would need more than a mere falling off in both earnings and price to give him a sound basis for purchase. He should require an indication of at least reasonable stability of earnings over the past decade or more—i.e., no year of earnings deficit—plus sufficient size and financial strength to meet possible setbacks in the future. The ideal combination here is thus that of a large and prominent company selling both well below its past average price and its past average price/earnings multiplier. This would no doubt have ruled out most of the profitable opportunities in companies such as Chrysler, since their low-price years are generally accompanied by high price/earnings ratios. But let us assure the reader now—and no doubt we shall do it again—that there is a world of difference between “hindsight profits” and “real-money profits.” We doubt seriously whether the Chrysler type of roller coaster is a suitable medium for operations by our enterprising investor.

We have mentioned protracted neglect or unpopularity as a second cause of price declines to unduly low levels. A current case of this kind would appear to be National Presto Industries. In the bull market of 1968 it sold at a high of 45, which was only 8 times the $5.61 earnings for that year. The per-share profits increased in both 1969 and 1970, but the price declined to only 21 in 1970. This was less than 4 times the (record) earnings in that year and less than its net-current-asset value. In March 1972 it was selling at 34, still only 5½ times the last reported earnings, and at about its enlarged net-current-asset value.

Another example of this type is provided currently by Standard Oil of California, a concern of major importance. In early 1972 it was selling at about the same price as 13 years before, say 56. Its earnings had been remarkably steady, with relatively small growth but with only one small decline over the entire period. Its book value was about equal to the market price. With this conservatively favorable 1958–71 record the company has never shown an average annual price as high as 15 times its current earnings. In early 1972 the price/earnings ratio was only about 10.

A third cause for an unduly low price for a common stock may be the market’s failure to recognize its true earnings picture. Our classic example here is Northern Pacific Railway which in 1946–47 declined from 36 to 13½. The true earnings of the road in 1947 were close to $10 per share. The price of the stock was held down in great part by its $1 dividend. It was neglected also because much of its earnings power was concealed by accounting methods peculiar to railroads.

The type of bargain issue that can be most readily identified is a common stock that sells for less than the company’s net working capital alone, after deducting all prior obligations.* This would mean that the buyer would pay nothing at all for the fixed assets—buildings, machinery, etc., or any good-will items that might exist. Very few companies turn out to have an ultimate value less than the working capital alone, although scattered instances may be found. The surprising thing, rather, is that there have been so many enterprises obtainable which have been valued in the market on this bargain basis. A compilation made in 1957, when the market’s level was by no means low, disclosed about 150 of such common stocks. In Table 7-4 we summarize the result