Common Stocks and Uncommon Profits and Other Writings

 
Is the Market Efficient? 
2 7 1 
patent protection. Unless this occurs, research and development 
energies will not be employed on a project, even though other- 
wise it might fit into Raychem’s skills. 
4. Raychem will only go into new products when it believes it can 
become the market leader in whatever niche, sometimes smaller, 
sometimes larger, that product attempts to capture. 
By the mid-1970’s, awareness of these unusual strengths was suffi-
ciently prevalent among those who controlled large institutional funds 
so that sizable blocks of shares had been taken out of the market by peo- 
ple who believed that Raychem was a situation of unusual competitive 
strength and attractiveness. However, it was another aspect of this com-
pany that gave Raychem its greatest appeal to these holders and was 
probably the cause of the high price-earnings ratio at which it was then 
selling. Many considered that Raychem, which was spending an above 
average percentage of sales on new project development, had perfected 
a research organization capable of producing an important enough 
stream of new products so that the company could be depended on to 
show an uninterrupted upward trend in sales and profits. These research 
products had quite justifiably a special appeal to the financial commu- 
nity because many of the newer ones only indirectly competed with 
older products of other companies. Primarily, the new products enabled 
high-priced labor to do the same job in considerably less time than had 
previously been required. There were enough savings offered to the ulti-
mate customer of these products to justify a price which should afford 
Raychem a pleasing profit margin. All this caused the stock toward the 
end of 1975 to reach a high of over $42½ (price adjusted for subsequent
stock splits)—a level about 25 times the estimated earnings for the
fiscal year ending June 30, 1976.