Wall Street Week with Louis Rukeyser; 0812; Growth Stocks Finally Pay Off

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Produced Friday September 22. Your host for Wall Street Week is Louis Rukeyser. Our panelists are Carter Randall Robert Stovall and Julius Westheimer. Tonight's special guest is ATC Brown vice president and portfolio manager T Rowe Price Associates Incorporated. That evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well Jimmy Carter could be forgiven this week if he concluded that when it comes to Wall Street he just can't win. We experience this week what seem clearly to be the high point of the Carter presidency at least to date. And the president won near universal applause for his patient two week effort in bringing the leaders of Egypt and Israel closer together diplomatically and politically. The president experienced some of it is happiest hours. But the financial polls as recorded by the stock market failed notably to join the celebration.

And since many people including some of our own resident in yes's have been predicting that the market would soar if any good news came out of Camp David Autor might understandably be wondering tonight exactly what he has to do to make those guys smile. But of course if he can't figure out the stock market that doesn't exactly make him unique. Even around here. Actually the market did cheer for Carter for about one hour Monday morning then arrive the first of several indications that when it came to the details of a comprehensive Mideast agreement Menachem Begin and Anwar Sadat might just possibly have been attending two different summits investors got the jitters about the possibility that it might all come unglued and that provided a perfect excuse to resume worrying about less cosmic matters like whether an ambitious young investor could really find wealth and happiness with the prime rate approaching 10 percent. Oh fragile bird of peace. Where have you flown.

Best you think however that the only sour pusses resided in Wall Street where the Dow Jones industrial average has now taken its worst two week battering in nearly two years is the same cynicism seems to have afflicted foreign money men who brushed aside Carter's apparent accomplishments and gave the dollar another punishing week. Wall Street wants peace in the Middle East you understand. It's just a little dubious and in general in a very bad mood. The chief source of that irritation became even more evident on Friday when the Federal Reserve Board raised its discount rate the interest it charges on its own loans to banks to 8 percent which matches the all time peak reached in 1974. And if anyone still were wondering what's worrying the rest of the troops. A Harris poll has just reported that a majority of Americans say their biggest worry is inflation with other economic concerns close behind.

It was a week then when the financial slot machines produced mostly Lemons a pace that was set appropriately enough by many of the formerly jackpots Coreen gambling stocks. Tonight we're going to see if there are any more jackpot yet to be found in the company of a big money manager who gets paid to payoff. First though let's go into the place that this week was nearly as big a spoilsport as the PLO and see what actually did happen in Wall Street. And the Dow Jones Industrial Average which last week lost twenty nine points added 16 more this week. Indeed it fell seven straight days before turning up slightly on Thursday and Friday this week. This week's loss of sixteen point one one points took the Dow down to eight hundred sixty two point four four and the declines afflicted not only the New York Stock Exchanges composite index but even more drastically the recently high flying American exchange and over-the-counter composites. For those who like to clutch at straws let it be reported that the Elves who compiled our technical market

index have after a long siege of negativism moved into cautious neutrality that clearly means either that a better day is coming or that the Elves have been eating too much chick pea and hummus in case you're wondering just how bad things have been this month on Wall Street. Our diligent statisticians report that on each of the five days through Wednesday more than 11 hundred stocks decline and that you will be pleased to learn is the worst such in market history. I should read you tune this in tonight. Well Bob Stovall why is Wall Street so rotten. The litany of woe you just recited is good reason I guess why we are somewhat on the defensive. I think the most important thing over the last fortnight or so has been that while interest rates have been ratcheting up the dollar didn't firmly in the past this year anyway. If foreigners have jumped into our market when interest rates have been going up because it helped bring the dollar up but we've

had this movement both ways and that without the foreigners to help our stocks go up I think our institutional investors not liking the leadership of the gambling stocks and the takeover airlines and other speculations have cut back their buying programs and as a result the market hasn't done well at all. But I've been encouraged because volume has been heavy. I like markets that go down on heavy volume. That means that selling gets over with sooner rather than later. It's when the markets go down on light volume that I worry it might last a long time. You like a lot of bad news all at once. That's right get it over with. These are almost as many buyers as there are sellers. Last time you were with you if you had pulled in your horns a little bit on this year. So so a little bit Klein probably doesn't surprise you because the big question is is it all over. Have we seen the people with them. I doubt it. You call me a historian sometimes Lou other times you call me other things but usually when we have only the most favorable. When we have a disappointing September it usually means that the stage is being set for a year end rally of some

materiality. So I'm hopeful that. The. Senate and of the one I don't think much John Roberts will that you were still in that village than it is and you know what it means for the short term. Now if it's reduction capital gains for the long run what else. Well not really I

was disappointed and surprised that the market not so much. Also maybe they heard you telling them what was coming that because they already knew it. I doubt it but I think there's more good news coming I think there are more concessions to save face for the other Arab nations. I think when there is less time what do you make of these disastrous fortnight. I had thought that a good day the result would trigger a stronger market this week. I was very disappointed and surprised I've been tossing and turning all week to try and figure out the reason and I think the reason is this. I think these days people's time horizons are much shorter than they used to be and they're worried about the immediate and even if Camp David had gone well and stays good it will mean a long term benefit for the world and for oil prices. But people are worried about current things the grocery bill which is inflation

high interest rates would prevent them from buying homes. The tightening of credit which occurred Friday also and the raising of the discount rate as you mentioned before people are worried about today tomorrow. There's been a lot of bad news on the inflation interest rates and that's one of them is the news not going to continue bad in the market. Well it may but on the other hand the market can get to a point where it's oversold the market is down 40 points in two or three weeks and I think it's gotten to like you said whether it's going to be buying or you know Lou the institutions still have a cent in reserve to spend and that must go in the stock sooner or later. So I do think there's better news a market from well in any event let's be of good cheer and merry hearts. Time to service our viewers. Gary Craig men of East Brunswick New Jersey wonders how an investor can take advantage of the growing interest in the art market. He notes that some of the major Auction Galleries have been reporting profits up by more than 30 percent. Would you recommend buying shares of those

companies either in London or in New York as an indirect method of benefiting from the increased value of Watson and apartment takes. Or do you have some other ways to do it. I think buying the galleries is a better idea than buying the paintings unless you like the paintings you're probably better off not buying them for investment. But South Bay Park Burnett is roughly twice as big as Christie's So the park Burnett has sales are up smartly this year 37 percent of the stock is now floating. The ADR is or trading in New York about five and three quarters and P E multiple on this year's earnings about 11 times. So I'd say that's the one. It doesn't look very good hanging over the fireplace. Not a bit. OK could a rant of one art form to another in this case that great cultural medium known as television. How would you respond to be a levy of West Hartford Connecticut who writes I believe cable TV will be very popular in the near future. Most of the suppliers in our area are privately owned.

How can I participate in this industry when you know a lot of people are watching this very program on cable TV and it is growing very rapidly. The problem is how do we invest. It's a growth industry but the companies engaged in it or very speculative. If I were going to do it I'd be very patient. I don't the biggest one stock a teleprompter but that's a highly speculative stock. The record of the management is a matter of history. I think patience and willingness to speculate may be all right. But over the long term doesn't depend on the quality of the programs I hope. Well I don't know about you is when I'm earnest Kirk of Waverly Ohio says he wonders whether financial analysts and the market has been terribly upset. One of the financial analysts who abandon the use of the measurement known as net income to sales traditionally says this indicator of the quality of a business is earnings. We're supposed to run around 7 percent. Would you explain how to calculate that ratio and how important

you think it is. Give us a couple of examples of stocks with good net income to sales. Well Lou I think it's a very important ratio and I don't think we have abandoned it. And after all the income the sales picture that's the bottom line that's like the score in a baseball or a football game that's what it's all about. You calculated by dividing the total sales picture which let's say is a million dollars into the net income picture which to say is $50000. So you get a ratio of a percentage of 5 percent which is about average. Some companies which have been very good on this recently are the drug companies like Merck and Schering Plough and Lilly and IBM and pencil. It's a very important ratio and we are using it already. If you're worried about the quality of your earnings or maybe the unfavorable ratio of your net income to your net debts come due in the would be capitalised. Send your questions along to us here at Wall Street. We always Mills Maryland 2 1 1 1 7 that's Wall Street Week Owings Mills Maryland 1 1 1 7.

Now before we meet tonight's special guest let's see how well the big money in Wall Street is done in picking winners for 1978. After all you may have done better those institutions have had some pretty rough years. So we took a list of the 20 stocks most widely held by institutions as compiled by vicars associates and assembled them in order from worst performer in 1978 the best unfair comparison remember that the Dow Jones Industrial Average rose 3.7 percent from the end of 1977 through the middle of the week has passed. When all these figures were only two of the institutional favorites actually had declined this year. Atlanta which field a McDonald's each of which was off very slightly a fraction of a percentage point three others gain less than the Dow. AT&T the institutions second largest holding Dupont and General Motors. The Dow itself of course was far from the market star performer this year. Exxon and IBM the number three and number one institutional holdings each advance close to

5 percent in the 5 to 10 percent range with General Electric Ford and barrels while the other 10 institutional favorites scored at least double digit advances. Phillips Petroleum Avon and Xerox were up between 14 and 18 percent since the year began. While the fifth biggest institutional holder in slumber they scored a 21 point gain. Now the numbers really start looking impressive. Halliburton support spared by more than 30 percent while Philip Morris with enough institutions called for to make it their number for holding a rose by thirty seven point one percent less widely held but more spectacular were NCR up more than 56 percent and SmithKline ahead by 85 percent and two institutions of a bit more than double. Polaroid which after a long siege of bad news was up by more than one hundred two percent this year and the best of all the 20 Boeing which at midweek stood nearly one hundred twenty nine percent higher than on New Year's Eve.

So while you as a smart and loyal viewer of this program may have done better it wasn't the worst of all possible years for the institutions or for some of their long term favorites. The growth stocks was this just a flash in the pan or can we expect further explosions. For some answers let's go over now and meet tonight's special guest Harry S. Brown. Ed welcome with a lot of heavy weapons like you like to be here they said. How do you see Brown does his stock picking for a 6 billion dollar institution he's a vice president an investment counselor for T Rowe Price and Associates which manages 4 billion in private accounts plus several mutual funds including the billion dollar growth stock fund which is the world's largest no load that is no sales to a large mutual fund. Mr. Brown is a graduate of Howard University has a master's degree in Electrical Engineering from New York University a graduate business degree from Indiana.

ED T Rowe Price still for most people symbolizes the addiction the so-called growth stocks. Stocks that were badly battered in this decade. What to do or learn from this experience. Well by way of background the list just look back at what happened since say 1972 which was the beginning of the latest under performance for growth stocks. We think that looking back with perfect hindsight that starts in general not just growth stocks but stocks in general over price. If you look at the. I'm out that investor was getting more investing and common stance. It's called the so-called risk premium that disappeared. How do we know 1962 when stocks were overpriced. Well that's what we've been working very hard on for the last five years. What we learned we learned about would have to take a closer look at the price that we paid for the road. In short that's the lesson. A very significant thing happened. How specifically with that effect that you're buying or not buying of a

particular stock you have an actual guideline as to how much you'll pay for a stock now. Well for each stock that we follow we do have a buy price and a sell price and that's determined based on our outlook for the company's earnings growth and its dividend growth. But the prices of those stocks in relation to their annual earnings got out of control than that. In fact at the end of 1972 growth stops when the price earnings ratio basis was selling at a 130 percent premium to the price earnings ratio of the market as a whole. So as measured by the Standard Poor's 500 and what is it today the day that premium that drop to 40 percent or a representative group how much is going to say. We think that looking at it the day from where we set about growth stocks are still undervalued. If you look at the aggregate characteristics of our

universe of common stocks we're looking at companies that we think can roll over the next five years at something in the order of 13 percent per year. But what's a growth stock a lot of stocks were supposed to grow stocks didn't grow very well. What are your stand for it. Well our short definition is that a growth stock is a company that's capable of producing earnings growth and dividends grow in excess of the general growth of the overall economy over the last five years as a as a modified growth stocks but grow the group of stocks that we follow through at 16 percent per year in terms of earnings. What happened was that the price earnings ratio the price investors were willing to pay eroded so the earnings come through but the price earnings ratio wiped out all of the brain. So the report did not show up and writes It's

a good time to buy stocks. We think so. We think today that there is an amount being offered above the rate of inflation a real return that one should look at for investing say in a fixed income security to invest in an asset that contains more risk. A common stock. What percent of assets to be in stocks. It really it really would depend on the individual institution or the individual with what stocks should people be looking at. If you wanted to find the ones you think you can do better over the next year or two looking at things come from a top down approach. We think that the most attractive sector of the economy will be business spending spending by business for plant and equipment. So therefore we would be very inclined to overweight the capital spending portion of the portfolio. What does that mean.

What kind of companies would we be looking at companies we prefer companies that are able to offer a labor saving or to increase productivity in this area would be thinking of the high technology companies or large companies. We would be inclined to use companies like Hewlett-Packard Texas Instruments or smaller companies. We would be looking at things like Intel and beta general. We also think that another attractive sector of the economy will be energy and we are particularly impressed or particularly favor the energy service companies in this area would be looking at Halliburton Schlumberger Baker International about the oil companies themselves. They are all competent themselves. We are using but for specific reasons. Likely going to go to the Nationals for example. We are favoring primarily because of the current.

There are some companies that we are looking at for example Philips petroleum that we think can offer incremental production. So for the oil companies there are different reasons for looking. We would favor the energy service companies in terms of waiting. At this point in time what were your view then is that the two big areas are capital spending and energy does that mean we're going to have an energy bill an energy policy. We think so we're very encouraged at the direction the Congress is heading and we think we will get the legislation. A very important thing to have at this point begin to growth before the panel grows any older Let's get to them. At my firm we tend to agree with you that the market looks higher this year maybe 950 Toppan next year maybe 10000 plus. And as to groups capital spending and energy exploration but I have a reservation about something if you're involved in and that's tax exempt bonds most investors seem to prefer unit trusts which are an Managed to

the managed in a simple bond funds because as far as I can see you give up almost a percentage point in deal for the privilege of having your fund manager for your tax exempt unit trust now yielding about six point six percent. And I just question whether anybody can manage a municipal bond fund to a point that makes it worth while paying that thing. While our current yield is 5.3 percent it could easily be six and a half percent would be 7 percent. If we were willing to invest in long term bonds based on our outlook for interest rates we'd see interest rates continuing to rise through the 1970s and into one thing we would like to have the ability to be able to put the money out at NAIA rates. So we've been tension only given up on current to have more to invest in later. So it's a conscious decision and of course this is one advantage a managed fund

over it's a managed fund managers can lose their overall outlook for the economy or interest rates and position of polio accordingly. Currently we're about 57 percent invested in long term add on that very subject the bond buyer index which is generally 6 10 something like that. And yet we're nearing record high interest rates on other issues and technics and bond rates have not gone up as much as other rights why. And as a corollary to that proposition 13 put a damper on the general obligation tax exam. The bond buying index set near and 77 was around five point seven percent. It increased to a peak in June July 6.3 and as you said currently is around 6.1 percent. We think that there's been a lot of buying by major

institutions. Some of the tax exempt bond funds insurance companies and banks have been a major force in the market and this has kept the rates down somewhat as opposed to the property market. We think that as we move into 1979 we can see rates move higher in this sector. We wouldn't be surprised to see that bond buyer index that's currently six point one up in the order of six point seven percent year in 79 which is one reason for our defensive posture. There's no slogan that I know the horse won't pick but there's the horse know it. You and I are pretty well convinced that growth stocks are the place to invest in. I as a merchandiser of stocks cannot get the public interested young people or people anybody. They're all leaving and going to bonds. What attributes of growth stocks how can we sex them up a little bit make them attractive so people will actually get in on this. We hope right. Investment. Well very interesting way. They say the individual investor the tax

laws are such that capital gains would be preferable to current income. Right. Individuals in a 50 percent tax bracket should be going for capital appreciation rather than current income which is taxed that twice the rate side. The thing that I would say for the investor is that here is a group of companies that are selling at about 10 times next year's earnings that are capable of growing at the rate not only of earnings but also a big income in the order of 15 percent per year over the next five years and that it represents good value. Let me ask an even more fundamental question. I'm confused by what you've said tonight. You've told us you think interest rates are going to rise right into 1980 and that's how we're going to have a good stock market. Although we're looking for a modest rise in interest rates right now we're sitting at about eight point six percent on a triple A whopping obligation. We could see that rate going to eight point nine percent say

by year end 7. So this is a 30 basis points or three tenths of a percent for Romney going up to scare it's not a huge rise in interest rates on short term rates resetting now at eight point one percent three month treasury bills. We could see that going say to 8.3 percent. It's not a he would rise and stop it won't be enough to terrify the market. That's correct. Thanks Ed Brown thanks to our panelist for joining us and I hope you'll be back with us next week will be talking with a very successful broker who has developed a fascinating technique for spotting undervalued stocks. His name is Ron Berger and over the last year and a half in a business that creates more than that share of bitterness he has made an awful lot of small investors happy. And next week he's promised to reveal his secrets. Meanwhile this has been Wall Street Week. I'm Louis Rukeyser. Good night. If you would like to obtain a written transcript of tonight's program send $1 to

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