What's a Bargain?

Wall Street brokers seldom take long lunches. They are afraid something will happen while they're out. Last week, most of them were just going to lunch when the day's blow struck. A storm of selling hit the market, driving down prices. By the 3 p.m. closing, the Dow-Jones industrial average was down 1.29 points. Next day the market went down again. Through the week, it continued to drop. At week's end, the average was down 5.57 points, and some $2.5 billion in stock values had been wiped out. All the market's gains for the past seven months had been canceled.

What had caused it? As usual, the Street had many answers. Some blamed short selling, selling by foreigners, uncertainty over the Marshall Plan and the plea to Congress by Bernie Baruch, a crack speculator himself, to forget tax cuts, put back an excess-profits tax.

Thomas W. Phelps, a partner in Francis I. du Pont & Co. and one of Wall Street's leading exponents of the famed Dow theory, voiced the most prevalent view. Said Tom Phelps: "Many Americans, despite their dislike of Communism, lack enough faith in capitalism to risk their money on its ability to produce sustained prosperity. Many others . . . lack not faith but cash to buy stocks after paying record high taxes and living costs. [As a result] the stockmarket remains the only uninflated segment of our economy."

Remnants. Analyst Phelps had made the understatement of the week. The gap between stock prices and stock earnings had narrowed to the point where the stockmarket seemed like a bargain basement. But even the hand-me-down prices were not tempting enough to investors.

All the old speculator's rules of thumb had gone by the board. Once brokers thought stocks were worth buying if they sold at no more than ten times their annual earnings. But last week, even the 30 "blue chips" used to measure the Dow-Jones industrial average were selling at only 8 1/2 times their earnings, the lowest ratio in over 20 years.

Against normal performance, the market had been sinking ever since earnings had started to rise sharply (see chart). Earnings on the Dow-Jones industrial stocks in 1947 had matched the 1929 level. Yet the average price was only slightly more than half as high. Investors had good reason to shy away from war babies and those that had never made money except in boom times. But, by prices alone, no one could tell last week which were war-and boom-babies, and which were likely to be consistent performers.

No Sale. Almost all the stock prices were hard to believe.

An old familiar company like Wesson Oil, which had earned a reassuring $23.15 a share, was selling at week's end at 43!, which was less than twice earnings.

Cleveland's growing Glidden Co., which had successfully branched out (e.g., soybean products) beyond its profitable paint business, earned $7.57, but sold at only 23 1/2, just about three times as much.

Lukens Steel Co., going into the booming business of clad metals, earned $8.92, but it sold at only 2% times that figure (22!).

What looked like the biggest eyepopper was Western Maryland Railway Co., which earned $7.34 a share last year, and sold last week at $10. The catch, as in many low-priced stocks, was that its arrears ($136) on preferred stock had to be paid before common stockholders got anything. Another eye-opener was American Woolen Co., which earned an estimated $15 last year and actually paid out $10 in dividends, but last week sold at $42.

Even such a blue chip as U.S. Steel went begging at $73 1/2, which was less than six times what it earned in 1947. Goodyear Tire & Rubber Co. brought only 3 1/2 times its earnings. Other blue chip markdowns:

Week's 1947 Price- Closing Earning Earnings Stock Price per Share Ratio American Can $78 1/4 $8 9.8 American Smelting 51 1/2 12 4.3 Chrysler 58 1/4 7.50 7.8 General Motors 51 1/4 6.70 8.1 Goodyear Tire 42 12 3.5 Loew's Inc. 16 1/4 2.75 5.9 Sears, Roebuck 34 1/8 4.75 7.2 Standard Oil (N.J.) 70 10 7 Texas Co. 54 1/2 7.50 7.3 U.S. Steel 73 1/2 12.50 5.9 Westinghouse 26 3/4 3.25 8.2

Prince & Pauper. The feast-&-famine industries were really feasting in these days of shortages. In the packing industry, Wilson & Co. stock sold at 16 3/4, only 2 1/2 times 1947's per-share earnings. Sugar stocks, depressed by the fear of a big Cuban crop, were about as low. Others:

Week's 1947 Price- Closing Earning Earnings Stock Price per Share Ratio Cudaby $12 1/8 $ 4.32 2.7 Armour 13 3/8 4.85 2.8 Swift 36 5.70 6.3 J. P. Stevens 30 1/2 8.24 3.5 Botany Mills 22 16.50 1.3 Cuban-American Sugar 13 3/4 6.13 2.3 Cuban-Atlantic Sugar 18&189; 10.680 1.8

Scores of stocks, including regular dividend payers, were selling at an average of only three times earnings. Samples:

Week's 1947 Price- Closing Earning Earnings Stock Price per Share Ratio A. M. Byers $18 $ 4.92 3.6 Consolidated Textile 13 5.69 2.3 D. L. & W. R.R. 9 1/8 1.93 4.5 Emerson Radio 23 1/8 5.65 4.1 Firestone Tire 35 3/4 13.46 3.4 Martin-Parry 17 1/4 5.97 2.9 Nash Kelvinator 16 1/4 4.17 3.9 N.Y., Chi. & S.L. R.R. 44 17.82 2.5 Outboard Motor 21 1/2 4.38 4.9 Schenley 28 3/8 7.46 3.85 John B. Stetson 13 3/4 3.77 3.6 Ward Baking 11 1/4 3.03 3.8 Warner Bros. 11 1/4 3.02 4.0 West Indies Sugar 23 10.78 2.0 W. Va. Coal & Coke 18 4.88 3.55 W. Va. Pulp & Paper 43 11.40 3.7

Explosion Point. Brokers had felt sure that sooner or later the market would reflect fat earnings (which are generally continuing) with a healthy spurt. But last week's drop changed many minds or clouded the crystal ball completely. One expert, who glibly tosses off words like "velocity ratings," "gaps." "double tops," "recoil," etc. to explain the market, finally gave up. Said he: "Frankly, I don't know what's happening. I'm baffled."

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