The Case for Stock Value Tables

Abstract

T HIS ARTICLE has been confined to an elementary approach to the problem of relating a stock's future prospects, as assumed or estimated by a prospective investor, to its current price. It does not touch upon the field of technical analysis, which is quite a different subject, but should always be considered as providing the background against which any study of an individual stock should be viewed. An excellent review of Case for Technical Analysis by Edmund W. and Anthony W. Tabell appeared in the March-April 1964 issue of the Financial Analysts Journal. The basic theory of the present worth of future rewards is now generally accepted as a fundamental part of our financial structure. Its first application to the value of common stocks, known to this writer, was made by Robert G. Wiese, now a senior partner of Scudder, Stevens & Clark, one of the country's leading investment counsel firms. Two articles by Mr. Wiese appeared in Barron's in September 1930. His application of the theory dealt with income and eliminated possible appreciation. This writer, working at that time with the same company, ventured a step further and, in April 1931, published a comprehensive book of tables on which he had been working the previous two years, to include possible capital appreciation in addition to three tables confined to income alone. There is one fact which no investor can ignore-The Bloodless Verdict of the Market Place. As related to the current price of an individual stock, this verdict often turns out to have been unrealistic when reviewed by hindsight. The analyst's work is to decide whether the current price is too high or too low as related to his own estimates of the stock's future prospects. Admittedly, we can never make anything -approaching such exact estimates of the returns we will receive from our stocks as bondholders can from their bonds. However, for any given rate of return, we can at least eliminate guess work as to whether the current price of a stock is too high or too low, insofar as it reflects our estimates of the future trend of growth of its earnings; the probable percentage dividend payout from such earnings; the number of times its earnings it can reasonably be expected to sell for at the end of any given period; and know the current price at which a stock should be bought to produce the desired return upon the basis of our estimates. There are thus six variables for a stock against only four for a bond all of which are known and not estimated. For any yield to maturity a Bond Yield Table will combine the rate of a bond's coupon with its years to maturity and give us the current price at which a bond should be bought to produce any given return. If a bondholder buys a 5% bond payable at par, he can capitalize his $50 income from his coupons upon a 5% basis and count upon receiving $1,000 when his bond is redeemed at maturity. This is not true in the case of a stockholder. If the bondholder has bought his bond at a discount, he will obtain a Capital Gain or vice versa-all of which is taken into consideration in his Bond Yield Table which gives him his true percentage return on his investment.