cautionary statements seem called for in the case of Emerson Elec-
tric, with a special reference to the market’s current valuation of
over a billion dollars for the intangible, or earning-power, factor
here. We should add that the “electronics industry,” once a fair-
haired child of the stock market, has in general fallen on disastrous
days. Emerson is an outstanding exception, but it will have to con-
tinue to be such an exception for a great many years in the future
before the 1970 closing price will have been fully justified by its
subsequent performance.
By contrast, both eltraat 27 and Emhart at 33 have the ear-
marks of companies with sufficient value behind their price to con-
stitute reasonably protected investments. Here the investor can, if
he wishes, consider himself basically a part owner of these busi-
nesses, at a cost corresponding to what the balance sheet shows to
be the money invested therein.* The rate of earnings on invested
capital has long been satisfactory; the stability of profits also; the
past growth rate surprisingly so. The two companies will meet our
sevenstatisticalrequirements for inclusion in a defensive investor’s
portfolio. These will be developed in the next chapter, but we sum-
marize them as follows:
- Adequate size.
- A sufficiently strong financial condition.
- Continued dividends for at least the past 20 years.
- No earnings deficit in the past ten years.
A Comparison of Four Listed Companies 3371982, issue of Forbesreported that since 1972 Emery had lost 72.8% of its
value after inflation. By late 1974, according to the investment researchers
at the Leuthold Group in Minneapolis, Emery’s stock had already fallen 58%
and its price/earnings ratio had plummeted from 64 times to just 15. The
“overenthusiasm” Graham had warned against was eviscerated in short
order. Can the passage of time make up for this kind of excess? Not always:
Leuthold calculated that $1000 invested in Emery in 1972 would be worth
only $839 as of 1999. It’s likely that the people who overpaid for Internet
stocks in the late 1990s will not break even for decades—if ever (see the
commentary on Chapter 20).
- Graham’s point is that, based on their prices at the time, an investor could
buy shares in these two companies for little more than their book value, as
shown in the third line of Section B in Table 13-2.