Financial History Issue 112 (Winter 2015) | Page 17

have predicted it in August 1921). At 147/8, the closing price on the day of the dividend announcement, the stock was valued at 6.8 times 1922 earnings and 5.6 times earnings for 1923. As General Motors prospered, so did the fortunes of GM’s largest shareholder, Du Pont. In cars and trucks, the one-time leading outfitter of the ordnance departments of the Allied armies had found a business steadier and faster growing even than human conflict. Of the 20 million GM shares outstanding in 1922, Du Pont owned 7.4 million. In that year, a gifted young investor took the trouble to compare the value of this single du Pont holding with the overall quoted value of Du Pont shares. The arithmetic revealed an anomaly. Just about all of the quoted Du Pont value was attributable to the value of the GM stock, and none to Du Pont’s own non-automotive earnings and assets. So the investor — Benjamin Graham, who is widely regarded today as the father of modern American security analysis — bought Du Pont while simultaneously selling GM. In Wall Street parlance, Graham performed a relatively riskless arbitrage operation, correctly reasoning that du Pont would sooner or later appreciate relative to GM. (The first thing he did upon founding Graham Corporation in the early 1920s, Graham relates, “was to buy some shares of Du Pont and to sell seven times as many shares of General Motors short against it. …So Du Pont was greatly undervalued by comparison with the market price of General Motors; in due course a goodly spread appeared in our favor, and I undid the operation at the projected profit.”) Then, again, like so many other stocks at the bottom of the market, Du Pont was cheap on its face, without reference to recondite techniques of valuation. Closely held, the shares rarely traded in 1921; at the 1922 low price of 105, they were valued at 6.3 times 1922 earnings and four times 1923 earnings (as those earnings were subsequently recorded). On August 24, 1921, the low point of the Dow, many stock prices translated into multiples on 1923 earnings of less than five times. That held true of the steel companies, but also of the kind of consumer product companies that had enjoyed a relatively prosperous depression. Thus, CocaCola, at $19 a share — 500,000 shares were outstanding, providing a stock-market capitalization of all of $9.5 million — was valued at what would prove 1.7 times 1922 earnings and 2.5 times 1923 earnings; the shares provided a dividend yield of 5.26%. Gillette Safety Razor Company, which was selling as many razors and blades in 1921 as it had in 1920, was quoted at a little more than five times forward earnings and yielded 9.23%. Radio Corporation of America (RCA), not yet revealed as one of the great growth stocks of the 1920s, could be purchased in the market for about as much as the company earned in 1923: $1.50 a share. As a matter of course on Wall Street, bargains go begging at the bottom of the market. In August 1921, stock prices had been sliding for almost two years. At such junctures, the memory of losing money is usually more vivid than the imagined prospect of making it. It did not take much imagination to recognize the value of F.W. Woolworth Company, the five-and-dime chain merchandiser that was finishing its 10th year as a fused corporate unit. Frank W. Woolworth himself, founder and builder of the gothic corporate headquarters tower at 233 Broadway in Lower Manhattan, had died in 1919, but his successors had distinguished themselves in the depression. They had stopped buying any but essential merchandise after the break in wholesale prices in June 1920, while the customers, happily, had kept right on buying. Now 1921 sales were on track to surpass the total for 1920. While other chain stores had raised prices, Woolworth hewed to the letter of its five-and-dime appellation (15 cents was the top ticket west of the Mississippi). And how was this exemplar of deflation-era merchandising — about to close its year without bank debt and with no mispriced inventory — valued in the stock market on August 24, 1921? At a price of $105 a share, or 3.7 times imminent 1922 earnings and 3.3 times what would turn out to be 1923 earnings. The stock yielded 7.62%. Ultra-low equity valuations naturally favored the “big constructive interests” who could avail themselves of them. But high real interest rates also advantaged the little American saver. In the days before the governmental safety net, thrift was a life-saving virtue. The unemployed could fall back on friends, family members, charity — and their own savings. In 1920, the nation’s mutual savings banks counted 9,445,327 depositors with aggregate deposits of $5,186,952,000. At an average of $549.16 per passbook, that was 40.9% of the $1,342 average national wage. In 1921, the population of depositors rose by 1.8%, the average deposit by 5.5%. Most of these deposits were rainy day funds, a New [ܚ