The A. & P. Example
At this point we shall introduce one of our original examples, which dates back many years but which has a certain fascination for us because it combines so many aspects of corporate and investment experience. It involves the Great Atlantic & Pacific Tea Co. Here is the story:
A. & P. shares were introduced to trading on the “Curb” market, now the American Stock Exchange, in 1929 and sold as high as 494.
- By 1932 they had declined to 104, although the company’s earnings were nearly as large in that generally catastrophic year as previously.
- In 1936 the range was between 111 and 131.
- Then in the business recession and bear market of 1938 the shares fell to a new low of 36.
That price was extraordinary.
- It meant that the preferred and common were together selling for $126 million, although the company had just reported that it held $85 million in cash alone and a working capital (or net current assets) of $134 million.
- A. & P. was the largest retail enterprise in America, if not in the world, with a continuous and impressive record of large earnings for many years.
- Yet in 1938 this outstanding business was considered on Wall Street to be worth less than its current assets alone—which means less as a going concern than if it were liquidated.
- First, because there were threats of special taxes on chain stores;
- second, because net profits had fallen off in the previous year; and,
- third, because the general market was depressed.
- The first of these reasons was an exaggerated and eventually groundless fear; the other two were typical of temporary influences.
Let us assume that the investor had bought A. & P. common in 1937 at, say, 12 times its five-year average earnings, or about 80. We are far from asserting that the ensuing decline to 36 was of no importance to him.
- He would have been well advised to scrutinize the picture with some care, to see whether he had made any miscalculations.
- But if the results of his study were reassuring—as they should have been—he was entitled then to disregard the market decline as a temporary vagary of finance, unless he had the funds and the courage to take advantage of it by buying more on the bargain basis offered.
Ref; Intelligent Investor by Benjamin Graham