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EASTERN MEDITERRANEAN UNIVERSITY. STOCK VALUATION FROM THE SIXTIES THROUGH THE NINETIES SÖZALP KAHVALTICI KUMRU YAVUZ . Stock Valuation from the Sixties through the Nineties. The Sanity of Institutions
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EASTERN MEDITERRANEAN UNIVERSITY STOCK VALUATION FROM THE SIXTIES THROUGH THE NINETIES SÖZALP KAHVALTICI KUMRU YAVUZ
Stock Valuation from the Sixties through the Nineties TheSanity of Institutions By the late 1990s, institutions accounted for more than 90 percent of the trading volume on the NewYork Stock Exchange. This volume represented a dramatic increase from 1960, when these professionalinvestors accounted for barely half of thetrading activity. The hard-headed, sharp-penciled reasoning of the prosought to be a guarantee that theextravagant excessesof the past will be avoided.
The Soaring Sixties • The New "New Era": The Growth-Stock/New-Issue Craze • Growth was the magicword in those days, taking on an almost mystical significance. Growth companies such as IBM andTexas Instruments sold at price-earnings multiples of more than 80. (A year later they sold at multiplesin the 20s and 30s.) • Promoters, eager to satisfy the insatiable thirst of investors forthe space-age stock of the Soaring Sixties, created new offerings by the dozens.More new issues were offered in the 1959-62 period than at any previous time in history.
It was called the tronics boom, because the stock offerings often included some garbled version of the word "electronics" in their title, even if the companies had nothing to do with the electronics industry. • Buyers of these issues didn't really care what the companies madeso long as it sounded electronic, witha suggestion of the esoteric. • For example, American Music Guild, whose business consisted entirely ofthe door-todoor sale of phonograph records and players, changed its name to Space-Tone before "goingpublic.“ • The shares were sold to the public at 2 and, within a fewweeks, rose to 14.
The tronics boom came back to earth in 1962. The tailspin started early in the year and exploded in ahorrendous selling wave five months later. Growth stocks, even the highest-quality ones, took the bruntof the decline, falling much further than the general market. Yesterday's hot issue became today's coldturkey. • Many professionals refused to accept the fact that they had speculated recklessly. They blamed thedecline on President Kennedy's tough stand with the steel industry, which led to a rollback ofannouncedpricehikes.
Synergy Generates Energy: The Conglomerate Boom • By the mid-1960s, creative entrepreneurs had discovered that growth was a word andthatthewordwassynergism. Synergism is the quality of having 2 plus 2 equal 5. Thus, it seemed quite plausible that two separatecompanies with an earning power of $2 million each might produce combined earnings of $5 million ifthe businesses were consolidated. • This magical, mystical, surefire profitable new creation was called aconglomerate.
Here we have a case where the conglomerate has literally manufactured growth. None of the threecompanies was growing at all; yet simply by virtue of the fact of their merger, the unwary investor whomay finger his Stock Guide to see the past record of our conglomerate will find the following figures:
Automatic Sprinkler Corporation • Is a good example of how the game ofmanufacturing growth was actually played during the 1960s. • Between 1963 and 1968, the company‘ssales volume rose by more than 1,400 percent. • This phenomenal record wasduesolelytoacquisitions.
its going down with merger activity, the price-earnings multiples of conglomerate stocks rose higher and higher. Prices and multiples for a selection of conglomerates in 1967 are shown in the following table.
The music slowed drastically for the conglomerates on January 19, 1968. • On that day, the granddaddyof the conglomerates, Litton Industries, announced that earnings for the second quarter of that yearwould be substantially less than had been forecast. • It had recorded 20 percent yearly increases foralmost a decade. • The market had so thoroughly come to believe in alchemy that the announcement wasgreeted with disbelief and shock. • In the selling wave that followed, conglomerate stocks declined byroughly 40 percent before a feeble recovery set in.
The combination of lower earnings and flattened price-earnings multiples led to a drastic decline in theprices of conglomerates. • The professional investors were hurt the mostin the wild scramble for chairs. Few mutual or pension funds were without large holdings ofconglomerate stocks. • An interesting footnote to this episode is that during the1980s and 1990s deconglomeration came into fashion. • Many of the old conglomerates began to shedtheir unrelated, poor-performing acquisitions to boost their earnings.
Performance Comes to the Market: The Bubble in Concept Stocks
THE SOUR SEVENTIES • There were only four dozen or so of these premier growth stocks that so fascinated the institutional investors. Their names were IBM, Xerox, Avon Products,Kodak,McDonald’s,Polaroid and Disneyland. They were called «Nifty Fifty». • What is Nifty Fifty? • They were «big capitalization» stocks, which meant that an institution could buy a good-sized position without disturbing the market. • These stocks were proven growers and sooner or later the price you paid would be justified. • They also were «one decision» stocks. You made a decision to buy them,once, and your portfolio-management problems were over.
What is Price Earnings Multiple? • A valuation ratio of a company’s current share price compared to its per-share earnings. Price Earnings Multiple 1972 1980 Sony 92 17 Polaroid 90 16 McDonald’s 83 9 Intl. Flavours 81 12 Walt Disney 76 11 Hewlett-Packard 65 18
Richard Nixon had been re-elected, peace was «at hand» in Vietnam, inflation was apparently under control and no one knew what OPEC was. But the market had already started to decline in early 1972 and when it did Nifty Fifty mania became even more pathological. • Market collapsed but Nifty Fifty continued to command record earnings multiples and on a relative basis the overpricing greatly increased • What held the Nifty Fifty up? • The same thing as tulip-bulb prices in long-ago Holland-popular delusions and the madness of crowd. The delusion was that these companies were so good that it didn’t matter what you paid for them, their ineroxable growth would rescue you.
The end was inevitable. The Nifty Fifty craze ended like all other speculative manias. • The oil embargo and the diffuculty of obtaining gasoline hit Disney and its large stake in Disneyland and Disney World. • Production problems with new cameras hit Polaroid. The stocks sank like stones into the ocean. • Avon Products down almost 50 percent in 6 months. • THE PROBLEM WAS SIMPLY THAT THE STOCKS WERE OVERPRICED. THE PROBLEM WAS NOT WITH THE COMPANIES THEMSELVES. INVESTORS WHO BOUGHT THOSE SAME STOCKS İN 1980 MADE GOOD RETURNS THROUGH THE END OF THE CENTURY.
THE ROARING EIGHTIES • The Roaring Eighties had its fair share of speculative excesses and again unwary investors paid for building castles in the air. The decade started with another spectacular new issue bomb. • The Triumphant Return Of New Issues • The high-technology new issue boom of the first half of 1983 was an almost perfect replica of the 1960s episodes with the names altered slightly to include the new fields of biotechnology and microelectronics. • Just getting a piece of a new issue automatically made you a winner.
The Triumphant Return Of New Issues • The flood of new issues contained such names as Fortune Systems, Spectravideo and Whirlyball International. • But probably the offering of Muhammed Ali Arcades International burst the bubble. This offering was not particularly remarkable considering all the other garbage coming at the time. • It was unique. The company offered units of 1 share and 2 warrants for 1 cent. Most of the investor did not like this so the result was a dramatic decline in small company stocks in general and in the market prices of IPO in particular. In the course of a year many investors lost as much as 80 or 90 percent of their money.
Concepts Conquer Again: The Biotechnological Bubble • What electronics was to the 1960s biotechnology became to the 1980s. The technology promised to produce a group of products whose uses ranged from the treatment of cancer to the growing of food that would be hardier and more nutritious because it had been genetically modified. • The key product that drove first wave of the biotech frenzy was Interferon, a cancer fighting drug. Analysts predicted tht sales of Interferon would exceed $1 billion by 1982. • Analyts continually predicted an explosion of earnings two years out for the biotech companies but they were dissapointed. • From the mid 1980s to the late 1980s most biotechnology stocks lost three quarters of their market value. • They plunged in the crash of 1987 and continued heading south even as the market recovered in 1988.
The Chinese Romance with the Lycoris Plant • An almost perfect replica of the tulip-bulb craze occured in China during the mid-1980s. • «Gentleman Blue» • During the early 1980s, a typical plant sold for approximately 100 Yuan (about $30. By 1985 prices increased 2000 fold to 200000 Yuan (about $60000). • At the end of the 1985 prices of this plant plunged 99 percent or more. By the start of 1986 a number Chinese Gentleman speculators were indeed blue...
Some Other Bubbles of the 1980s Alfin Fragrances: A cosmetics company jumped into the spot light in late 1985 when it announced a new face cream, Glycel , which could slow the aging process and reverse skin damage. But unfortunately one dermotologist claimed this product was harmful for the human body. So the stocks which sold near $40 in early 1986 fell to near $2 in 1989. ZZZZ Best: It’s a carpet cleaning business but they laundering money for the moob instead of cleaning carpets. Most investors lost their entire stake after they busted.
