Because of the general market overevaluation of electronic^ stocks there have been increasing talks of an electronics "doom." Another reason for this predicted doom is the currently preponderant dependence of the electronics industry on defense spending. As is well known, the sales to the government constitute 55 to 60 per cent of total five to six billion dollars of electronics output. The industry will presumably get into trouble when the government slows its rate of electronics purchase. What would happen to the industry, some analysts argue, when, as, or if there comes disarmament? Even without disarmament, they contend, the electronics industry is due to undergo such a rate of attrition that the majority of the electronics outfits will fall by the wayside as they fail to make the grade.

All these, coupled with the rapidly expanding industry capacity, lowering profit margins and slowness in placement of orders by the government, have brought about a sharp market reappraisal of electronics stocks since May 1961.

This dramatic market turnabout is partially shown by the following table by Science & Electronics Investment Letter: (Almost all of them have drifted lower since then.)

                                                1961                            Price
Stock                                       high                              11-26-61
Varifab                                     16                                5¼
Photronics                                15½                             4¼
Dynatherm                                14                                48
Itek                                          61                                33½
Baird-Atomic                           26¾                             13
Dewey, G. C.                           32                                10
Dunn Eng.                                2l4                               10½
Lab. for Elec.                           70                                35
Ionics                                       44                                223/4
Microdot                                  33                                l9½
Hewlett-Packard                      53                                343/8
Data Control                            28½                             l3¾
Scantlin                                    42                                27¾
Resisto Chem.                          13½                               84
Infrared Ind.                             25                                131/2
Telex                                        31½                             21
Jonkers Bus. Mach.                  18                                  7¾
Varian                                      77a                              45½
Servonics, Inc.                          31                                  54
Robinson Tech.                        314                              21
Farrington                                 29½                             10
Gen. Devices                            22                                  64
Medtronics                               l5½                                3½
Hermetite                                 23                                  9
Babcock                                  39                                271/4
Lynch Com. Sys.                      22½                             13
Edger. G. & G.                         59                                38
Heinicke Inst.                           30                                13
Julie Research                           15w                               9½
Milipore Filter                           54                                43
Crescent Eng.                           13                                  81/4
Collins Radio                            50¾                             32
Research Spec.                        22                                14
Dyn. Corp. Am.                       20¼                             l3¾
Gulton                                      73                                49
Chicago Aerial                          30½                             l7½
Clifton Prec.                             55                                36½
United Electro.                         40                                20½
Avien                                       293/4                           131/8
Vitro                                        36                                153/4
Microwave Assoc.                   603/8                           37½

This sharp market reversal actually is inevitable in view of the past speculative excesses in electronics stocks, with their resultant unsupportably high prices.

Perhaps you remember how the public scrambled in 1960 for the 1,000,000 shares of Transitron Electronics Corporation which was a Boston-based maker of such semiconductors as transistors, diodes and rectifiers, and had aroused more stir in Wall Street than anything since the Ford Foundation's sale of Ford stock.

In addition to the general glamour of electronics stocks, Transitron was known to be second to the then high-flying Texas Instrument in over-all sales of semiconductors. In the fiscal year ended June 27, 1959, it had per share earnings of 86¢. Priced at $36 a share, it was made to command a price-earning ratio at about the same level as Texas Instrument which was then selling for 37 times earnings. By contrast, thirty seasoned blue chips in the Dow-Jones Industrial Average then could be bought for less than 20 times earnings.

Transitron had so caught the public imagination that a tremendous clamor for the stock had developed before its offering. There was estimated demand for about 10 million shares—ten times the number offered. One broker called it "foolish" to price Transitron on a par with Texas Instrument. He credited the latter with greater depth in research and management personnel —both deemed vital to survival of any semiconductor-making firm in this increasingly competitive field. At the first day of public trading, however, the stock was quoted at 44 bid, 45 asked. It hit a 1961 low of I634, while Texas Instrument hit its low of 95. Both stocks made new lows in 1962.

Since the Transitron offering, there have been far more excesses in new electronics issue offerings which made the Transitron issue appear to be a modest one. Investors who know next to nothing about electronics chased electronics stocks the way people had chased gold in the old gold-rush days. Even the more sophisticated institutional investors caught the electronics fever.

The principal reason was, of course, the meteoric rise in the  market value of many electronics stocks which had whetted the appetites of tens of thousands of investors. Take these classsics for example: Texas Instrument made its market debut at 5 in 1953; it hit a high of 256¼ in 1960; Litton Industries, initially offered in 1954 at 6, established a high of 192 in the same year.

The spectacular market performance of electronics stocks in the past few years has encouraged a great number of companies to enter the field, leading to a condition of current unprofitability in many areas, especially in the transistor and other semiconductor fields.

The industry is confronted with a shakeout of great magnitude. It will probably go through the same evolution of other great industries, notably the automobile industry, whose story was a grim testimony how a battle among nearly forty different types of automobiles forty-five years ago has led to the survival of comparatively only a few. That does not mean, however, that investor bullishness about electronics stocks is not basically justified. Even disarmament would not mean the end of electronics despite the industry's heavy dependence on government spending.

Disarmament or no disarmament, government expenditures for electronics goods and services would most probably remain at a very high level. For, unless there is a basic change in U.S. and Russian world policies, the best that can be hoped for between them is a sort of armed truce. "The nature of this armed truce," said Dr. Harry Greenfield in What Shakeout in the Electronics Industry?, "is such that the armaments of which it is comprised are becoming progressively more electronic. From 4 per cent of total military spending in 1950, electronics is expected to reach approximately 20 per cent by 1965. So long as neither we nor the Soviets are ready to alter our respective politicoeconomic systems, so long will an element of distrust exist. The ensuing modus vivendi will be almost entirely electronic in nature, for only through electronics can the necessary hearing, and communicating over vast distances, on, above or beneath the earth's surface be effected "The electronic core of such a system will in all probability consist of active and passive satellites, telemetry systems, global computer complexes, ultra-sensitive detection systems, as well as global communications networks. I would go so far as to say that a thoroughly effective surveillance system, constantly changing to remain at maximum efficiency, will entail costs that may equal and very likely exceed current government spending for electronics."

And, there is the tremendous potential market for industrial electronics. The industrial electronics market is estimated to reach $4.1 billion by 1965, a 128 per cent increase over 1960's approximately $1.8 billion and a hefty 317 per cent increase for the decade. That's why experts see it as a successor to the automobile industry. Should defense spending behind electronics decline, the professionals envision greater government use of this innovation by private industry to help the transition to peacetime usage on a grand scale.

Though a relatively new science., electronics already has become important in almost every realm of human activity. Its impact might be as great as the invention of the steam engine or the introduction of the wheel in the history of human progress. Electronics is not just another great growth industry. It is a whole field of science. It is what Louis H. Whitehead termed "MANY Industries."

The scope of its application is constantly expanding. Medical electronics is one of those areas. Data processing is another. Rapid strides in data processing, for instance, should continue to be made with great increases in application. On the one hand, its tie-in with communications will lead to far greater application of each; on the other, it permits more complete automation in many manufacturing processes as well as in process industries-There never has been the slightest doubt about electronics being a growth industry.

All this doesn't imply, however, that you shouldn't be extremely cautious about buying electronics stocks even after their recent sharply downward revision in market prices, for their price-earnings ratios are still generally high relative to the whole market, which is especially true of smaller, more speculative issues.

You must have heard a lot about how many of today's prominent electronics firms started out in a basement laboratory or garage workshop. A substantial portion of them have begun with no assets except for a few ideas or a few enthusiasts who are eager to get into the booming electronics business. That's how hundreds of small electronics firms came into existence, especially during the Korean War when it was comparatively easy to get into military electronics.

Many found themselves in trouble when the Pentagon started cutting back the number of weapons systems ordered and, worse still, the copies of each of such weapons systems.

In order to keep military spending within its budget, the Pentagon from time to time has to cut back marginal weapons systems. With the number of weapons systems shrinking, small electronics firms have to go after more dollars per sales. They have found it increasingly hard to live on making components alone, or even subsystems. They get to handle bigger and more sophisticated packages or even complete systems. This usually calls for more production facilities or simply a bigger company with more integrated facilities.

There are many who believe that to be adequately integrated, an electronics company nowadays should have a size capable of handling about $50 million in annual sales. This $50 million figure is, of course, subject to argument. While some settle for far less than that, others look for even higher figures.

According to Richard E. Krafve, president of the big-league, diversified Raytheon Company, by 1970 the inevitable shakeout in the industry will result in perhaps seven or eight large integrated companies producing a wide range of electronic products from components to systems. Mr. Krafve foresaw a new era of prosperity for Raytheon, leading to gross sales of over $1 billion by 1970.

While the degree of integration may not be as drastic as seen by Mr. Krafve, the integration movement is likely to lead to the disappearance of many of the smaller specialized types of companies. The need for specialization will lessen as the more integrated companies close their product gaps, though there should be still room for well-managed specialist firms.

The hardship for smaller, narrower-line firms is expected to accelerate because of competition from quite another direction.

Formerly buyers of electronic gear, plane makers are now jumping into the business of manufacturing them. These customers-turned competitors are running head-on into independent electronics concerns. The whole struggle is taking on a cloak-and-dagger aspect, as the scramble for the electronics end of the defense business has been getting hotter every day.

Moreover, as it is still comparatively easy to get into the electronics business with a little capital—hundreds of new concerns are incorporated every year, making the industry still more competitive.

The mortality rate for electronics concerns has been and will probably remain high. Market evaluation of the electronics issues could change overnight and sharply, and without much warning to stockholders. While it's not unusual for small, well-situated electronics stocks to double market valuations in a short time, it's also fairly common to see them going in the other direction just as abruptly.

There is, of course, nothing dishonest on the part of many fledgling firms trying to make good, mostly on the money raised from a new stock issue. Behind their attempt is the dearest of  all American dreams: that fortunes can be made with a strike of technological or scientific genius and that laboratory successes are not necessarily the offsprings of superior facilities or money.

Hundreds of technical firms have been formed in America every year in pursuit of this dream. Many were organized by men who had left the security of an established business to start one of their own. However, for every company which succeeded in realizing its dream, perhaps half a dozen failed.

As investors we are concerned more about the safety of capital than anything else. We shouldn't let ourselves be carried off in a moment of market excitement. Not even over some genuine scientific or technical achievements, or even "breakthroughs." Stock buyers should decide to buy not just on the basis of a single device or even "breakthrough," but on a broader and deeper consideration.

Though there are all kinds of breakthrough claims, many are actually nothing but product innovations. It is naturally difficult for a layman to distinguish one breakthrough claim from another in these days of highly complex technology, though it would surely be advisable to get into a situation found to be basically sound and equitably priced even without whatever should finally turn out from behind that breakthrough.

The preliminary test to be met in selecting a sound scientific stock is a basically strong technical position of the underlying company in its field of specialization.

It would be dangerous indeed to buy indiscriminately with but a vague idea of the company's relative trade position in the industry. Still more dangerous would be buying into a company only vaguely known to be operating generally in a so-called growth area, without specific merits of its own. Take the so-called computer stocks, for example. There are all kinds of companies operating in the rather broad computer field. Some make highly sophisticated computer systems; others only make components; still others operate in the fringe areas of computers. Take missile stocks as another example. There is a lot of difference between companies which make highly complex control  and guidance systems and those which make missile launching installations. The latter is simple construction work!

In the aftermath of recent sharp market setbacks for glamorous issues, investors have awakened to the necessity for using much more realism in the appraisal of electronics stocks. They are being subjected to the same value tests, measurable by the same financial yardsticks used by analysts in the evaluation of other industry groups, though recognition is given of the further substantial growth assured for electronics throughout the next decade in this age of great scientific advance.

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