WALL STREET: The Yankee Tinkerers

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The most fascinating phenomenon on Wall Street these days is the spectacular rise of the growth and glamour stocks.

For investors who knew how to choose well, they have made some tidy profits.

They have also created a new class of management millionaires who rank with the Rockefellers and the big rich of Texas, and who prove that—despite high taxes—it is still quite possible in the U.S. to get impressively rich in a short time.

Among listed growth stocks, none has risen faster than one that appears on the ticker tape as FAV—for Fairchild Camera & Instrument Corp. An investor who bought $1,000 worth of Fairchild stock when it was selling at its 1958 low of 19½, and held onto it, last week would have had nearly $18,000 worth of stock. Fairchild makes a long list of imaginative products, ranging from a new silicon semiconductor to the first 8-mm. home sound motion-picture camera. It is one of the Street’s most cherished buys, ranking with such rapid risers as Texas Instruments (72⅛ to 214¾ in 18 months), Polaroid (97¾ to 215½) and Universal Match (46¾ to 271⅛on a pre-split basis).

A big part of Fairchild Camera’s magic lies in the man who lent it—and several other companies—his name: Sherman Mills Fairchild, 64. Fairchild talks about his present and future products with all the excitement of a 20-year-old with his first sports car. He is the epitome of the new scientist-businessman-inventor who is the driving force behind the success of the growth and glamour stocks. Cut from the same Yankee tinkerer mold as Ben Franklin, Thomas Edison and Henry Ford, he never got an engineering degree—yet has more than two dozen patents in his name. He flatly says, “I have no urge to make money”—yet has piled up a fortune of more than $80 million.

Many Faces. A man of amazing versatility, Fairchild invented the first practical aerial camera when only 23, and to carry it. designed the first U.S. plane with a cabin for both pilot and passengers. He founded Fairchild Engine & Airplane Corp. and Fairchild Camera, of which he owns 22%. He is the biggest stockholder in International Business Machines (99,864 shares), which his father helped found, and one of the biggest of Pan American World Airways, which he helped build.

His interests range far beyond science and business. His love for popular music led him to found the Fairchild Recording Equipment Corp., a high-quality manufacturer of sound reproduction products. His enthusiasms include architecture (he helped design his own house), cooking (he studied at Paris’ Cordon Bleu cooking school), jazz (he plays a competent hot piano), dancing, philosophy, tennis and—since he is one of Manhattan’s most eligible bachelors—beautiful women. Almost anything can touch off a new interest: irritated one day at the way his matches blew out in the wind while he tried to light a cigarette, he designed a match that could not be blown out (by cutting a slot below the matchhead for air currents to pass through).

Searching in Garages. The phenomenon of growth and glamour stocks is, not surprisingly, one of Fairchild’s greatest interests. “Growth is an old story to me,” he says. “I’ve been a stockholder in IBM all my life. A growth situation gets down to the question of an analysis of human needs. People are getting more money and more leisure time continually. To offset the cost of this, we are increasing our human efficiency to pay ourselves added benefits. That is the kind of business, for example, that IBM is in—enabling people to do more so that they can have more rewards from life.”

To thousands of investors from Wall Street to Walla Walla, the way to get the rewards—in the bank account—is to find another IBM, Fairchild Camera, Polaroid or Texas Instruments to invest in. Across the U.S. roam sharp-eyed stock analysts searching out their quarry in the laboratories of big corporations, where a new product might mean a new industry, in dilapidated factories, where old businesses may transform themselves with new ideas, or in cellars and converted garages, where a new business may have just been born. The happy hunting ground of the new firms is the over-the-counter market, home of unlisted stocks, where buying is often far riskier than in the more ordered world of the listed exchanges, with their careful records of earnings and dividends. Most of the new companies float only a small amount of stock, keep a hefty nest egg of unissued stock to finance future growth and protect their own interests in the company. Thus, when investors find a promising new infant, the scramble to fondle it often brings fantastic results. Example: New Orleans’ Kalvar Corp., which started in a garage, sold 75,000 shares of stock at $20 a share four years ago. Last week it was selling at $300 a share, though the company has never earned a penny. Investors bought because a handful of big corporations are working to develop a new copying device using a film process developed by Kalvar.

What is a growth stock? To the unsophisticated, it is simply a company whose stock goes up fast. Wall Street has more precise definitions. Samuel Stedman of Loeb. Rhoades & Co., the high priest of the growth cult, believes that a growth stock’s per share earnings must grow at least 12% to 15% compounded annually.

If its earnings are compounded at 25%, it will double in three years. From this definition arise some complicated formulas. If stock in a company .growing at 25%, for example, now makes $3 a share and sells for eleven times earnings, it will cost $33 now, should be worth at least $66 in three years. But many analysts think that a stock growing at 25% should sell for more than 30 times earnings—which would make today’s $33 stock really “worth” $90 now and $180 in three years. Result: the smart investor is willing to pay far more than $33 today in hopes that it will be worth $180 in three years. Other brokerage houses have their own formulas to justify the high price of growth stocks. But most agree on broad definition: a growth stock is a stock of a company in an industry that is growing faster than the economy (now a 4% increase yearly), and which itself is growing faster than the industry.

Era of Great Change. At the turn of the century, railroads were the great growth stocks; after World War I, retail-store chains took off; and utilities were the growth stocks of 1929. Chemicals, liquors, oils, motion-picture companies, airlines—all at one time or another have been the darlings of Wall Street. Now many of them have become sedate blue chips, and no longer show the growth and earning potential that the Street demands. After a ten-year rise in which their market value almost trebled, many blue chips seem to have temporarily exhausted much of their growth potential. Since January, the Dow-Jones industrials have dropped 7.2%, while ten representative glamour and growth stocks have gone up 17%.

Today’s growth stocks may claim their title for many reasons. Most of them are found in new or rapidly changing indus tries that are either riding new trends or testing new frontiers of knowledge: electronics and missiles, which have spawned some of the best performers; recreation and leisure, where such firms as Brunswick Corp. (bowling equipment) and NAFI Corp. (pleasure boats) have profited by the move to the suburbs and extra leisure time; drugs, where an outpouring of new products has brightened the future of such firms as Schering and Merck; vending machines, which promise to bring a new era of merchandising; and foods, where General Foods, for example, has been a leader in the revolution in the kitchen.

Inventive Brains. The hottest growth stocks are those that have the extra ingredient of glamour: a unique or fascinating product, or even the possibility of developing one. Born of an age of rockets and missiles, their companies bear such intriguing names as Itek (information classification), Haloid Xerox (office copying), Transitron (transistors), Ampex (tape recorders). Ionics (electrically charged filters that desalt water), and High Voltage Engineering (electronu-clear machines).

Each of these companies has one prime asset: inventive brains. The ability to develop new ideas and products is more prized today than such old measuring rods as a stock’s book value. To Sherman Fairchild, the reasons for buying growth make good sense. When he decided to buy stock in Minnesota Mining & Manufacturing Co., which was a growth stock ten years ago and still is, he called up the Wall Street office that he set up just for investment purposes. “They asked me if I didn’t want to see the balance sheets of the company,” says Fairchild. “I said no, I’ve met their people, and that is good enough for me. Everyone I met seemed to know his business, what the company objectives were, and how they proposed to get there. Why look at the books? In growth companies, you need people with vision and organization.” The new growth and glamour stocks, selling at up to 100 times earnings (blue chips average a mere 16 times earnings), are of such dubious value by older stand ards that Wall Street has its own jokes about them. Jack Dreyfus, head of the $109 million Dreyfus Fund, recently satirized the glamour business: “Take a nice little company that’s been making shoe laces for 40 years and sells at a respectable six times earnings ratio. Change the name from Shoelaces, Inc. to Electronics & Silicon Furth-burners. In today’s market, the words ‘electronics’ and ‘silicon’ are worth 15 times earnings. However, the real play in this stock comes from the word ‘furth-burners,’ which no one under stands. A word that no one understands entitles you to double your entire score.

Therefore, we have six times earnings for the shoelace business and 15 times earnings for electronic and silicon, or a total of 21 times earnings. Multiply this by two for furth-burners, and we now have a score of 42 times earnings for the new company.” Concluded Dreyfus dryly: “In today’s market, studying securities can be fatal. While you’re studying them, they’re apt to double, and by the time you find you wouldn’t have bought them in the first place they will probably have tripled.”

A common complaint about growth stocks is that they rarely, if ever, pay dividends, thus do not provide a steady income. But, says Sherman Fairchild, “this question of dividends has been given much more importance than is due it. If a stock doubles in value every five years, it actually pays a dividend of 20% a year if you sell half your stock at the end of a five-year period, and it is taxed as a long-term capital gain. There is no point in making artificial distinctions between stocks that pay income and those that do not pay income but have growth.”

Gravel for Grass. Sherman Fairchild amply meets his own definition of managers with vision. “If you can do constructive thinking along unorthodox lines in business,” says IBM President Thomas Watson Jr., “you have it made. Sherman Fairchild is able to think along unorthodox lines.” Fairchild’s departure from orthodoxy begins right at the front door of his town house on Manhattan’s East 65th Street, where he conducts all the affairs of his companies. The house is the height of a three-story house, but actually contains six levels built around an inner courtyard. Instead of staircases, long, floating ramps connect the staggered floors. In the midst of Manhattan’s bustle, the soundproofed, air-conditioned house is a quiet and sunny refuge whose ten rooms are filled with evidences of Fairchild’s fertile mind. These range from green courtyard gravel that looks like grass (he had stones coated with green ceramic) to a complete control booth for recording in his lavish living room, and louvered shutters fronting the street that can be opened or closed by pressing a button.

Fairchild once kept an office in Rockefeller Center, but moved to his home for convenience after a major intestinal operation (a colostomy). His condition has not slowed his pace. He receives a steady flow of visitors at his dining-room table, experiments with sound in his control room^ with color in his photography room, with new components for cameras and rec ords in his basement workshop. He keeps a mechanic busy in a Long Island labora tory translating his ideas into working models.

Fairchild is a prodigious reader who subscribes to more than 200 technical and general publications, tears out articles, jots notations on them and shoots them off to officials of his companies. He dictates a steady stream of letters (about 80 over a normal weekend) into tape recorders scattered through the house, has them typed by secretaries working in two shifts in a basement office.

No One Had the Nerve. “I’d still like to invent the products,” says Fairchild, “but the business has become too big for that.” Fairchild believes that it is not enough simply to develop a product that is slightly better than a competitor’s. He had no interest in bringing out a movie camera that was only an improvement on cameras on the market. But when his re searchers came to him with the idea of a home movie sound camera, he gave en thusiastic approval. “Fellows from the camera company came to see me and said they could produce an 8-mm. camera with sound,” he says. “It had never been done before, but, having built a lot of recorders myself, I knew it could be done. So I gave those fellows encouragement.”

Although Fairchild is chairman of all his companies, he prefers his role of technical adviser. “If things are going well,” he says, “I do not butt in. My forte is not management. But when things don’t go well, I butt in.” Fairchild Camera was showing few signs of growth in 1957 when Fairchild himself stepped in to run the company, “to the consternation of a good many people.” But Fairchild brought in hard-driving President John Carter, 40 (with the lure of an option deal that could net him, at current prices, about $8,000,000), now gives him free rein. The company meets Fairchild’s definition of growth—25% a year—will gross $80 million this year, earned about $1.60 in the first half compared to 79¢ in the same period last year. Carter is outspokenly independent about Fairchild’s role: “He used to make all sorts of suggestions, but no one ever had the nerve to tell him when they wouldn’t work out. Now he still makes all sorts of suggestions. The stuff that’s no good we screen the hell out. The stuff that’s good we do something about.”

Fairchild relishes such independence—so long as it gets results. He also thinks that “every growth situation has two elements of leverage—not only the growth of the company itself, but the ability to pick up other companies that have not realized their possibilities.” Last month Fairchild Camera gave final approval to a merger with DuMont Laboratories (1959 sales: $19 million), which makes TV tubes and products in other fields where Fairchild wants to expand.

Fairchild realizes that not every company can be a growth company. One of his own, Fairchild Engine & Airplane (1959 sales: $114 million), is in an industry “without growth possibilities.” Fairchild Engine suffered from the cancellation of the Goose missile, and its F-27 turboprop transports have not sold well to feeder lines. Fairchild hopes to branch out into new products, feels that “every business has something in it that has growth, even if the business as a whole does not.” One new development that could help his company: the USD-5, an unmanned electric-eye drone capable of flying over enemy territory to take pictures and send back data electronically.

The products of Fairchild Recording Equipment Corp. have so far been too expensive to be a commercial success, but Fairchild is confident that it “will make back every nickel eventually.” An early backer of Dr. Gabriel Giannini, the noted physicist, Fairchild in 1946 bought into Giannini Controls of California, a manufacturer of transducers and other sensitive flight instruments. He now owns 9% of the company, which is growing at a 25% yearly rate under Fairchild-picked President Donald Putnam, 35.

No Ponies, No Yachts. With all his wealth, Fairchild leads an expensively simple life: “I have no yachts, no polo ponies, no house on the Riviera.” But he does have a ten-room chateau-type second home at Huntington, L.I., where he plays tennis on a $25,000 enclosed court. Fairchild is a friend of and frequent host to jazz musicians, recently threw a party for Old Friend Hoagy (Star Dust) Carmichael. At such parties, Fairchild likes to get into his control booth and record performances, mix drinks at his bar (he drinks little himself), or rustle up a quick meal for his guests. His current favorite: a recipe he picked up in Italy for dumplings made with ricotta (Italian cottage cheese) and ground spinach.

Well-meaning friends are constantly introducing him to pretty young women. Fairchild usually takes them to dinner, sometimes gets so involved in a technical or musical discussion with friends that the girl is left to stare vacantly at the wall. His maiden aunt, May, in her 80s, lives with him. “I don’t know why I haven’t gotten married,” he says. “Perhaps it’s that I’ve been so busy. Let’s hope it isn’t too late. I’m not a bachelor by conviction. I think I am very unfortunate.”

Raiding the Plant. Fairchild has been tinkering ever since he was old enough to handle tools. His father, George Winthrop Fairchild, the first president and chairman of IBM, encouraged his son and let him range through his plant near Oneonta, N.Y., raiding it for parts for young Sherman’s inventions. Sherman went off to Harvard in 1915, where he designed a forerunner of the news flash camera, but was packed off to Arizona in his sophomore year when threatened by tuberculosis. Though he later attended both the University of Arizona and Columbia, he never bothered to get a college degree.

Not long after, Fairchild built his famous aerial camera. Left $2,000,000 when his father died in 1924, he set up Fairchild Aviation and turned it into a $6,000,000 business in a few years. Wall Street bankers, eying it as the nucleus for a “General Motors of the air,” bought control. But the new management was not equal to the idea, and Fairchild got his company back in 1931. In 1936 he formed Fairchild Engine & Airplane Corp. in a share-for-share spin-off of Fairchild Aviation, turned the older company into Fairchild Camera. Fairchild hired J. Carlton Ward Jr., a vice president of United Aircraft, to head Fairchild Engine, and Ward led the company during World War II, when its sales shot from $3,300,000 to $102 million.

Lucky Break. Ward and Fairchild had a falling out in 1946 over Fairchild’s steady barrage of ideas, and Fairchild resigned from the company. Three years later he returned to wage a zestful proxy fight, plotted the battle so carefully (he even put real stamps on proxy letters because he felt that people ignored prestamped envelopes) that he won the battle five to one. He promoted Vice President Boutelle to president. In 1958, after Fairchild Engine lost its huge missile contract and went into a tailspin, Fairchild replaced him with J. M. Carmichael, former chairman of Capital Airlines. Boutelle, bearing no grudge, still speaks of Fairchild as “an extremely gracious, nice person,” asked him to be best man at his second wedding.

In 1957 Fairchild got what he admits was a “lucky break.” Eight young scientists working for Beckman Instruments decided to leave en masse with their idea for producing an extremely advanced transistor. After several companies turned down their request for financial backing, they came to Fairchild. He set them up in Fairchild Semiconductor Corp., as a division of Fairchild Camera, gave them stock in Fairchild Camera. Their success in developing the transistor (division sales may hit $30 million this year) is partly responsible for the spurt in Fairchild stock.

Fairchild takes no salary from any of his companies, believes that he should be on the same basis as other stockholders. “My sole objective is not to make money but to do something that is a substantial improvement over what has been done before, because if you do that you will make money in the long run.”

New Millionaires. Like Fairchild, most of the men responsible for the success of the nation’s new growth companies are intensely curious and dedicated men who started out to do something new rather than simply make money (although they hoped to do that too). Among the new millionaires : ¶Edwin H. Land, chairman, president and research director of Polaroid Corp., was worth $95.4 million personally (plus $99.8 million in stock held by his family) when Polaroid stock touched $256.50 a share earlier this year. Every time Polaroid’s stock moves two points, the Lands’ wealth rises or falls by $1,522,000. Their stock has risen in value by $86.8 million in the last 18 months alone. The genius behind Polaroid’s success, bright-eyed, boyish-looking “Din” Land, likes to spend much of his time in his lab in Cambridge, Mass., where he works endlessly on new ideas. Polaroid is now working on a two-minute color film for its camera. Land believes that, with present and planned products, Polaroid’s growth prospects are excellent.

¶Arnold O. Beckman, 60, is a former assistant professor of chemistry at California Institute of Technology who did a friend a favor by making a “pH” meter to test the acidity of lemon juice, set up shop in a garage in 1935 to manufacture them for industrial testing purposes. The small beginning grew into Beckman Instruments, which now has sales of $45 million, makes analytical instruments. Beckman owns 37% of his company’s 1,380,000 shares, which is now worth $44.9 million.

¶Frank J. Prince, 72, controlling stockholder of Universal Match Corp., is the man who gave the world the vending machine that can change paper money. The biggest manufacturer of coin-handling devices, his company has jumped its sales from $12.1 million when he took over in 1951 to an estimated $85 million this year. Prince owns 650,000 shares worth $39 million, takes little part in day-today operations, says, “My main task is to look ahead and plan acquisitions.”

¶ John Erik Jonsson, 58, chairman of Texas Instruments Inc., was not worth very much money only seven years ago—and neither was his company, specializing in geophysical work for oil companies. The stock sold for $5.13 a share. Then he began to pick up companies, entered the military electronics field with transistors and other electronic devices. Last week the company’s stock sold at 214.75. Jonsson now owns stock worth $82 million. His associates have done nearly as well: Texins’ executive committee chairman, Eugene McDermott, owns shares worth $65 million and President Patrick E. Haggerty shares worth $26 million. They and other top executives have given away nearly 70,000 shares to educational institutions.

¶ Leo and David Bakalar, chairman and president of Transitron Electronic Corp. of Wakefield, Mass., have run up a stock fortune of $307 million (another $34.4 million has been realized in cash) on an initial investment of $200,000 made by Leo, 47, a plastics manufacturer at the time. The investment was backing for an improved gold-bonded diode developed by David, 35, who has a Ph.D. from M.I.T. Since then, the company has grabbed 10% of the semiconductor market (second among independents only to Tex as Instruments), last fiscal year ran up sales of $30.9 million, which the Bakalar brothers expect to jump to $45 million-$50 million in the fiscal year just ended.

¶Charles Bates (“Tex”) Thornton, president of Beverly Hills Litton Industries, was an Army Air Corps colonel at 28, the planning director of Ford Motor Co. at 32, the operating boss of Hughes Air craft at 35. At 47, he is a hard-working executive worth $37 million in 443,024 shares of Litton stock. It all started when he quit Hughes in the exodus of brains (TIME, Oct. 5, 1953), started his own company, which is one of the fastest-grow ing electronics firms (1959 sales: $125 million), claims to be the biggest U.S. manufacturer of desk calculating machines.

Growth companies have not only created a new breed of management millionaires but have added some hefty figures to existing fortunes. Millionaire Laurance Rockefeller, a backer of Bos ton’s Itek Corp. and its biggest stock holder, bought 259,765 shares at an average cost of $1.41. His present 195,197 shares in the company, now discussing a merger with Chicago’s Seebring Corp., were worth $12 million last week. More than 1,100 Texas Instruments employees, buying stock under a special purchase plan, have spent just over a million and a half for stock now worth more than $6,000,000. The stock of one $3,600-a-year employee last year added $5,525 to its value.

Wall Street’s Lehman Brothers has been one of the biggest floaters of growth stocks (Litton, Beckman, etc.). At first, most other big Wall Street houses showed little interest in the field. Smaller houses with low overhead and a hungry eye stepped in. Says Belmont Towbin of C.E. Unterberg, Towbin: “We’ve made 30 to 40 millionaires”—including himself. Wealth has worked no great change in the lives of most of the new executive millionaires. They are a new breed too interested either in their companies or in scientific research to indulge themselves with their new fortunes. Arnold Beckman and his wife, for example, still live in an Altadena house he built in 1933 while teaching at Caltech.

Perils of the Future. But all that has glamour may not always grow. What is the tomorrow of today’s growth stocks? Sherman Fairchild, like many experts, believes that the indiscriminate buying of growth stocks “has gone too far.” Though brokers are wary of saying flatly that a stock is selling too high, they realize that it is perilous to project earnings five or ten years into the future. Particularly in the growth sector, technology is changing so fast that a new product, a competing process, a better method hit upon by a competitor can collapse a stock in a hurry.

What alarms many analysts is that investors neither carefully investigate what a company really has planned for the future nor realize that in many cases, even if a company succeeds in bringing a new product to market, it may not have the facilities to sell it, or a market big enough to make money. The big talk in the electronics industry is of the coming “shake-out” that will spell doom for many of the 5,000 firms now in the industry. Even in the glamorous transistor field, only the strongest and most inventive companies can hope to prosper in the increasingly tough competition.

The best among the growth companies are convinced that older growth industries lost out because they did not keep abreast of—or sufficiently ahead of—the needs and desires of industry, Government and the consumer. To keep ahead, the growth companies are spending large amounts on research (an average 6%-9% for the electronics industry v. 3% for all industry).

U.S. politicians are now engaged in an argument about whether the U.S. rate of growth is big enough; along with Democrats, Rockefeller talks of favoring a forced annual growth rate of 5% or 6%, while Republicans contend that anything beyond the average annual rate for the past 50 years (3%) is manipulation, and could lead to inflation and a bad crash.

The argument seems remote and insubstantial to the growth industry men, who in their own companies are not satisfied with growing less than 25% a year. They set high goals for themselves because they have immense confidence not only in the future of the U.S. economy but in their own ability to influence its course, to fulfill needs before they are fully recognized, to change the times rather than merely keep up with them.