RCA (1925-1929) and Microsoft (1993-1997)

RCA -

Radio Corporation of America (RCA) was Wall Street's darling high-flyer tech-stock of the 1920s. It made many investors and speculators millionaires. The RCA stock market symbol was known alike by bankers and barbers from New York to San Francisco. It had a virtual lock monopoly on "wireless" communications for the masses. There was no serious competition in sight.

 

In essence RCA was the leading-edge of the high-technology of the day. Undoubtedly, it enjoyed the same dominance in its field as Microsoft commands today in Operating Systems and related peripheral software.

 

In the five years prior to the Great Crash of 1929, RCA stock soared from about $11 to its September 1929 high of $114 (adjusted for the 5 for 1 stock split in February of that fatal year). That's an appreciation of 936% in only five years -- equal to an annual compound return of a monumental 60%. Also unbelievingly incredible was the fact it never paid a cash dividend! Investors didn't care, since the stock value increased almost daily. At its 1929 peak RCA boasted an astronomical price/earning ratio of 72:1.

 

MICROSOFT -

During the past five years one would indeed be hard pressed to find a stock with more market appreciation and dominance in its field than MICROSOFT. Many struggling competitors have litigation pending against the software company's near monopolistic hold on its area of endeavor. Even the federal government is challenging MICROSOFT's alleged unfair dominance.

 

All this has inflamed investors interest in its stock. During the last five years MICROSOFT has soared nearly 700% -- equivalent to approximately a compound yearly stock price rise of 50%. Phenomenal! Just like RCA during its early history and meteoric stock price increase, MICROSOFT has never paid a cash dividend since going public. Needless to say, investors could care less. Interestingly, MICROSOFT's price/earnings ratio was a very lofty 57:1 at its all-time high of $150.75 in August this year. Indeed high by today's standard. Recall the S&P 500 has an average PER of about 23.

 

THE COMPARISON

Many analysts have already shown that the traditional measures of market valuations are TODAY more over-extended than in 1929 and 1973, just prior to each market crash. In each of the previous Bear markets High-Tech stocks were decimated. But since this writer's analysis began with RCA and MICROSOFT, the comparison is limited to these two stocks.

 

The chart below shows the price movement of each stock. Please recall the RCA prices are adjusted back for the 1929 stock split of 5 for 1. Since the price changes of both stocks were similar, it facilitated super-imposing both curves on the same chart, thus allowing an easy visual comparison OF WHAT HAS HAPPENED, AND MORE IMPORTANTLY, WHAT COULD HAPPEN... in the event of another vicious Bear market like 1929 or 1973.

Note (1): All Microsoft prices reflect the 2 for 1 stock split in 1997.

Note (2): Radio Corporation of America split 5 for 1 in February 1929. Therefore, all prices were adjusted backwards to reflect the split. Multiply all prices prior to split by 5 for historical trading comparisons.

From RCA's 1929 high of $114 the stock price dropped for the next three years, reaching it nadir of less than $3 per share in 1932.

This represented a loss from its 1929 peak of 97%.

This writer does NOT suggest history will repeat itself. However, not to appreciate the vicious potential for loss in the best of stocks in a full-blown Bear market is to be imprudent... indeed financially reckless. If we are to experience another devastating Bear market, strong companies will survive just like RCA did. But it may take many l-o-n-g years to again reach all-time high market price levels.

vronsky

October - 1997