Barometer statistics.—In many industries which center chiefly upon the converting of a single com modity, such as wheat to flour, cotton to ducking, or hides to leather, it is possible to compile statistics of the prices of raw materials and finished products. Altho these may not exactly correspond to actual prices paid, yet a clue will be given as to the approxi mate size of the spread of prices or converting profit out of which the company must make its earnings. Changes in this spread may be compared with re ported changes of net earnings or stock prices. If a close agreement appears for a period of years, these statistics may be used as a special barometer with the idea that if discrepancies show themselves they are to be made the starting points of new investiga tions.
Accounting and market tests.—Mr. W. Mar tin Swift has given the following tests for an accept able preferred industrial stock: For the practical investor the following rules may be laid down, subject, of course, to a reasonable variation where exceptional conditions exist. Increases of capitalization, ex cept for the purpose of acquiring new plants, which carry with them a proportionate increase in the volume of business done, should at once arouse doubts as to the investment value of a preferred stock. Earnings available for preferred dividends, in order to render the issue high grade, should be about double the dividend rate; and in the case of a com pany having a bonded debt, they should be more than dou ble. Working capital, as disclosed by balance sheets, should show an increasing tendency except in years of business de pression, and these increases should not ordinarily be re garded as genuine unless they are reflected in the prices of the company's securities. Bonded debts should not in any event exceed 50 per cent of the aggregate market value of all outstanding securities ; and where it exceeds 35 per cent, earnings on the preferred stock should be exceptionally large.
Earnings should be from 15 to 20 per cent on the capital, and half of them should be put back regu larly into the property.
As to market tests, industrial stocks usually sell at from eight to fourteen times their yearly surplus earnings per share. Each branch of industry tends to have a characteristic ratio. Telephone and tele graph stocks are usually worth eleven and one-fourth times their yearly average surplus per share. These ratios rise and fall like the tides of the sea, increasing with speculative enthusiasm and declining in periods of depression and pessimism.
11. Listing.—Listing should not be looked upon as a hall-mark of excellence. It indicates a certain minimum standard of regularity and decency, but its chief value is to provide a ready market and a sensi tive barometer by which investors' and dealers' opin ion about the policies of a corporation may express itself. In providing this sensitive record, however, a
means is given by which an infinite number of in fluences arising from market conditions may reach and influence the quotation of a security. In many cases, these influences have little or nothing to do with intrinsic value.
12. Inflated conditions.—A word of warning as to the present abnormal condition of American busi ness under the influence of the World war should be given. Great profits are being made, and stocks have been marked up to unprecedented figures. These conditions are temporary. The ordinary market ratios quoted above and elsewhere in this book do not apply to businesses influenced by war orders. The extra equipment now being provided to take care of these orders will add very little to property values after the close of the war. It may, indeed, for years to come, hang over the market as an excess equipment. Present prosperity is creating a rising tide of enthusi asm. Upon it there is being floated up from the un der-world of finance a flotsam and jetsam of weak consolidations, ambitious extensions and out-and-out "gold bricks." 13. Classification of industrials.—The investor may carry on for himself the further study of in dustrial securities by defining the different classes into which business falls, and securing a general knowledge of the distinguishing characteristics of each class. He may then concentrate attention upon some one or two groups, in the endeavor to gain ac curate knowledge of certain sets of underlying condi tions. Among the various classes of industrials there may be recognized the iron and steel group, noted for its extreme fluctuations; the agricultural im plement manufacturers, responding to changes in the prosperity of the farmers; the equipment industries catering to the railways and rising and falling with them; and the machinery industries pos sessing a broader patronage. There are the tobacco manufacturers whose even prosperity bespeaks the power of a habit, and the New England textile mills whose similar prosperity is the result of financial con servatism. As footballs of national politics, there may be mentioned the shipbuilding industry and the sugar refining industry. There is the chemical industry which has made great strides thru elimination of Ger man products, and the fertilizer industry languishing for German potash. There are the brewing stocks giving way in the face of advancing prohibition. Among the newer arrivals may be mentioned the mail order and chain store enterprises, growing rapidly, and including large items of good-will built up by na tional advertising campaigns.
A selection of industrial quotations, as of Septem ber 8, 1916, is here submitted.