Sunday, 4 March 2012

The Investor and Market Fluctuations: The story of the Great Atlantic & Pacific Tea Company Shares (1)

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

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