Over a long period of time, solid investment values remain the most durable criteria in the selection of equities. In these days of generally high market prices, however, they have become rarities, especially available at bargain-counter prices.

When we say solid investment values, we have two things in mind: (1) a high degree of market stability and (2) long-range growth potential. An outstanding example of such solid investment values is Lehman Corporation which, at 29d (October 16, 1961), is 3.3 per cent discount from its net asset value of $30.91 at the end of the 1961 September quarter. Its asset value actually fails to reflect its true value because of the many substantial unrealized capital gains in its portfolio which will be distributed to stockholders in the form of dividends, capital gains and increased asset value over the years.

Whenever speculative fever runs high, investors tend to forget such basic investment criteria as asset values, income and capital structure. Asset value is a company's book value as reflected in the balance sheet. Book value has become less of a factor in determining price as the market has attached more and more importance to such "intangibles" as patents, franchises, trade names, which are often omitted or carried at nominal amounts on the books. The disparity between book values and market values was, of course, particularly wide in the recent market, where earning, growth or prospects for growth far outweighed the book values of assets.

Many investment trust shares are available at sizeable discounts partly because of lack of sales promotion and partly because investors normally prefer direct stock ownership. When you own stocks in an investment trust, you have only indirect ownership in the securities of the investment trust's portfolio.

They are shares of the "closed-end" investment firms, as contrasted with the "open-end" mutual funds and most of them have traded on the New York Stock Exchange. Investors need only to pay a comparatively small NYSE commission for buying these shares in contrast to the "high load" charged by mutual fund shares.

In addition to selling at a discount from their net asset value, investment trust shares afford the investor the benefits of experienced management, diversification of holdings and reasonable hope for long-term capital appreciation.

In its May 1960 Investment Letter, Carreau & Co. tabulated investment trusts to illustrate the disparity between net asset value and market value per share, as shown by the adjacent table.

In addition to the "leverage" in capitalization, Carreau & Co. listed the following factors as determining the size of discounts for the investment trust shares: (1) options outstanding to buy shares at less than net asset value; (2) amount of unrealized cap ital gains, since such gains become taxable when realized; (3) management policies in retiring shares in the open market; and (4) performing record of management over a period of years, that is, its ability to increase net asset value per share faster than the market in a rising phase and preventing net asset values from declining as rapidly as the average during a market decline.

                                                                                             Discount
                                       Latest reported          Recent           from
                                       net asset value           market           net asset
                                       per share                   price              value
Adams Express               $29.92                      25                 10.57%
American International     16.33                        15                   8.2
Carriers & Gen.               29.11                        28                   3.8
Consolidated Inv. Tr.       23.37                        18                 23.0
General American Inv.     26.63                        24                 10.0
Lehman Corp.                 26.53                        26                 —
Madison Fund                 19.39                        17                 12.4
Niagara Shares                22.00                        20                   9.1
Tri-Continental                46.85                        34                 27.5
U.S. & Foreign Sec.        32.26                        27                 16.2

Well-selected investment trust shares sometimes are clearly ideal buys for small investors not only as "discounts" from asset values, but also as a "single-package" diversification.

One such situation is Lehman Corporation, founded and managed by the investment banking firm of Lehman Brothers. Lehman Corporation has a broadly diversified portfolio of common stocks plus some holdings of preferred stocks and bonds. Its major industry holdings as of September 30, 1961, were: utilities, 17.9 per cent; oil and gas, 13.0 per cent; office equipment, 10.1 per cent; chemical, 7.5 per cent; metal and mining, 7.3 per cent; drug, 6.6 per cent.

Emphasis has been placed on equities promising long-term growth and satisfactory income return. Its flexible investment policy has been responsible for its success in coping with the constantly changing market conditions during the past three decades. While its major holdings are in "best" or substantial companies, it has taken growing stakes in carefully studied special situations.

The growth of Lehman shares can be best seen from the following statistics compiled by Purcell analysts: "A stockholder who paid $10,400 for 100 shares of capital stock of Lehman Corporation when it was originally issued, and kept his investment continuously since then, would have held on September 30, 1961, 1,200 shares of capital stock with a total net asset value of $37,092 and a market value of $35,850. During this period, he would have received in dividends a total of $14,563 paid from the Corporation's net ordinary income and a total of $18,031 from gains realized on investments. The value of rights received in July 1951 and February 1955 are not included in these figures."

Shares of an investment company with such an impressive record appear underpriced at a price level below or near its net asset value. They should provide an excellent vehicle for conservative investors to buy what Purcell analysts call "premium talent at a discount" with better than average prospects for longer-term capital appreciation.

Other examples of good investment trust shares selling at discount are National Aviation Corporation and Petroleum Corporation of America.

The shares of National Aviation Corporation, at 28a (October 16, 1961) were about 6 per cent below its net asset value. The company had over 56 per cent of its holdings in aircraft and space securities. It has been alert to the changes in the ever-changing aerospace field.

The common stock of Petroleum Corporation, at l5¾ (October 16, 1961) was about 12 per cent below its net asset value. The company has diversified holdings in oil, natural gas and land development firms.

Besides the investment trust group, opportunities to obtain liquid assets in excess of cost of shares also exist in industrial companies. Such situations would become attractive if their managements know how to make use of their strong liquid positions. A recent Wiesenberger Report listed the following ten seasoned companies with large liquid assets, with some of their stocks selling at considerable discounts.

                                                               Per Common Share
                                                Recent              Net working
Issue                                        price                 capital*            P/E
American Sugar Refining           325/8               $22.56             13.7
Cleveland-Cliffs Iron                 45                    76.29               15.1
Cuban-American Sugar            l51/2                19.69               20.8
Dunhill International                  l58                   20.45               72.0
Electric Autolite                        62½                 62.06               34.5
Filtrol                                       235/8               15.83               14.0
Houdaille Industries                  l95/8                22.13               16.1
Mclntyre Porcupine                  423/4               49.68               36.9
Montgomery Ward                   333/4               44.66               34.1
Pennsylvania Railroad               l45/8                21.69

* Plus marketable securities.

Cleveland-Cliffs Iron, for instance, has about two-thirds of its working capital in listed securities, primarily in steel companies, with its price of $45 per share (October 27, 1961) representing a 41 per cent discount from net working capital and marketable securities amounting to $76.26 per share.

Pennsylvania Railroad, for another example, at the price of l4s (middle of 1961 price range) was 44 per cent below the market value of its holdings in Norfolk & Western Railroad alone amounting to $20.73 per share of PA common.

Or, in the case of Electric Autolite, its cash and marketable securities alone amounted to $54.4 million as of June 30, 1961. Since the company reduced its outstanding shares by 20 per cent in the second half of the year, midyear working capital was equivalent to $62.06 per common share which was close to its recent price of 62½.

However, "asset bargains" are not necessarily attractive because the market more often than not has a good reason for placing a low price tag on a company's liquid assets. Maybe its industry outlook is not good; maybe the company itself is slipping; or maybe there is something basically wrong with the management.

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