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Can A Company Turnaround?
You might also be on the lookout for what Wall Street calls the turnaround situation. A company has a long history of first-class earnings and then comes up with a miserable quarterly earnings report. The company in the first quarter of 1970 showed earnings of 5 cents compared to $1.01 in the first quarter of 1969. They even suspended the dividend. The insiders, the speculators, rushed to dump the stock. The price of the stock "went through the floor," a Wall Street term which is pretty descriptive of a stock that drops dramatically low. Let's suppose the stock is White Motors. And let's suppose that your uncle is an executive of White Motors. He says the reason for the bad report was the truck strike of 1970 and poor farm machinery division business. He says the company is taking steps to cut down the number of farm machines in its dealers' hands, and the truck strike is over. He says he thinks that the country's business has started to improve and so the trucking business will improve as trucking companies are called on to haul the extra goods. The trucking companies will then buy more trucks. He says White will regain vigorous earnings in the near future. Well, you have every confidence in his judgment. You see that the stock went from a high of near $60 in 1969 down to a low of $9% in 1970 after the drop in earnings. You buy fifty shares at $121/4 in the belief that your uncle is right and that it will get back to its 1969 price area and will also resume its $2 dividend. In other words, you consider this to be a turnaround situation. Notice that in the White case, though, the P/E ratio, even with so severe a drop in earnings, didn't drop as much as it might have. Five cents a quarter earnings, if they continued, indicate yearly earnings of about 20 cents. Divided into the $9.62 price of the stock this would give a P/E ratio of 48-1. This would be very high instead of very low, indicating that the average stockholder felt that the 5 cents was unusual and that there would be a rebound from that lowlevel, certainly, before much time had passed. The P/E ratio, then, is a "now" tool that you have to work with to decide whether a stock is a good buy. Last year's P/E ratio is not much good to you, and an estimated one for next year is just a guess. But the present P/E ratio, studied carefully and compared with last year's, can be most helpful. Besides company analyses put out by brokerage houses, there are company histories. The analyses give you the analyst's estimate of the company's future prospects with a short history of previous years to back up that estimate. The histories, on the other hand, give past performance only and from that you make up your own mind about the future. The best of these, the most complete, is put out by Standard & Poor. It features two full pages, one sheet on both sides, of information on each company on the New York Stock Exchange and many on the American and over-the-counter exchanges. There is a short resume of the company and its products or services. Then there is condensed chart information about the earnings past and present, its debt, short-term borrowings, the bond issues, the preferred stock, and convertible issues if any, and a paragraph on proposed plans. Then a chart showing earnings for many years back, high and low common stock price range, P/E ratio high and low for the same years, and other items you need to compare from year to year. In short, the company in capsule form is before you when you study one of these sheets. It is loose-leaf, and is being updated constantly. Naturally the company history is a valuable tool for beginner or expert. How do you get a chance to use it? I have never been in a brokerage house office that didn't keep copies of it for the use of customers. You can look up nearly any stock--certainly any stock you as a beginner ought to be considering--in it, and can copy down the facts. Sometimes your registered representative will Xerox the sheet of the company you are the most interested in for you to study at your leisure. Standard & Poor is one of the best and most basic tools to give you a knowledge of a company. Article Directory: http://www.articledashboard.com Learn more about Nuwave Oven and the Bark Off programs today. |
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