Common Stocks and Uncommon Profits and Other Writings

RAYCHEM, DASHED EXPECTATIONS,
AND THE CRASH 
Toward the close of the June 30, 1976, fiscal year, Raychem was hit by 
two hammer blows, which were to play havoc with the price of the 
stock and with the company’s reputation in the financial community. 
The financial community had become very excited about a proprietary

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polymer, Stilan, which enjoyed unique advantages over other com-
pounds used by the airplane industry for coating wire and which was 
then in the final research stages. Furthermore, the polymer was to be the 
first product in which Raychem would go basic, that is, make the orig-
inal chemicals in its own plant rather than buying raw materials from 
others and compounding them. Because of the appeal of the product, 
Raychem had allocated by a considerable margin more funds to this 
research product than to any other in its history. The financial commu- 
nity assumed this product was already on its way to success, and after
passing through the usual “learning curve” experienced by all new
products it would become highly profitable. 
Actually, quite the opposite was occurring. In the words of the 
Raychem management, Stilan was “a scientific success but a commer- 
cial failure.” Improved products of an able competitor, while technical- 
ly not as desirable as Stilan, proved adequate for the job and were far 
cheaper. Raychem management recognized this. In the course of a rel-
atively few weeks, management reached the painful decision to abandon 
the product and write off the heavy investments made in it. The result-
ing charge to earnings for that fiscal year was some $9.3 million. This 
charge-off caused earnings, exclusive of some offsetting special gains, to 
drop to $.08 a share from $7.95 the previous fiscal year. 
The financial community was as much upset by the erosion of the 
great confidence in the company’s research ability as by the precipitous 
drop in earnings. Largely ignored was the basic rule that some new 
product developments are bound to fail in all companies. This is inher-
ent in all industrial research activity and in a well-run company is far 
more than offset in the long run by other successful new products. It 
may have been just bad luck that the particular project on which the 
most money had been spent had been the one to fail. At any rate, the 
effect on the stock price was dramatic. By the fourth quarter of 1976, 
the stock had dropped to a low of approximately $14¾ (again adjusted 
for subsequent splits amounting to six to one) or to approximately one-
third its former high. Of course, only a tiny amount of stock could be 
bought or sold at the low point for the year. Of greater impact, the stock 
was available at prices only moderately above this low level for months 
thereafter. 
Another development also affected the profits of the company at 
this moment and contributed to Raychem’s fall from favor. One of the 
most difficult tasks for those responsible for the success of any growing 

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