Eight pairs of companies

Why it matters

H&R Block and Blue Bell (end of 1969). Block, the tax-return company, had grown fast. Its stock sold at more than 100 times its latest earnings and nearly 30 times its tangible assets. Blue Bell, the work-clothes maker, sold at about 11 times earnings, against about 17 for the S&P index. Graham notes that Block was twice as profitable per dollar of capital, but Blue Bell:

• did four times as much business,
• earned 2½ times as much for its stock,
• had 5½ times as much tangible investment,
• paid nine times the dividend yield,

and yet was valued at less than a third of Block. Graham credits Block's momentum and prospects. His doubt was whether the price already counted all that one could reasonably expect. By February 1971 both had recovered from the 1970 fall, and Blue Bell had risen considerably more. Still, Block's rise of some 35% from its 1969 price is, Graham says, a warning against being too quick to sell good companies short.

His conclusion. Better-growing, more profitable companies usually sell at higher multiples, which is logical. But where speculative interest is heavy and the company's soundness is in question, the stock is often plainly overvalued. The analyst's best work is finding the minority of cases where the price is clearly below value.

He also shows that most of these stocks fell sharply in 1961–62 and again in 1969–70: investors should expect such falls.

Zweig's commentary (2003) repeats the exercise with eight new pairs from the dot-com years. His main point: "there is no such thing as a good stock", only good stock prices, which come and go. A company can be excellent and its stock still too dear.