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