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Time for the Famous Nifty Fifty to Soar Again?By
Monday, June 16, 2008
The name "Nifty Fifty" came to represent the "one-decision" stocks of the early 1970s. They were the Cokes and the Disneys of the world... Fifty names you always bought simply because you couldn't go wrong owning them. Or so investors thought... Believe it or not, these "boring" names soared in the early 1970s, reaching a dot-com style peak in 1972. In 1972, Coke sold for 46 times earnings. And Disney was even more expensive, at 71 times earnings. Then, both stocks lost three-quarters of their value in two years. And these are just two examples. Similar losses occurred throughout the Nifty Fifty. Looking back on the situation,Forbes magazine said: The delusion was that these companies were so good, it didn't matter what you paid for them; their inexorable growth would bail you out. Obviously the problem was not with the companies but with the temporary insanity of money managers – proving again that stupidity well-packaged can sound like wisdom. It was so easy to forget that no sizable company could possibly be worth over 50 times normal earnings. But investors soon forgot what Forbes said about earnings, and history repeated in 1999. Coke and Disney soared to over 40 times earnings. Once again, people thought these companies were so good it didn't matter what you paid for them. But once again, they were wrong... Today – nine years later – the share prices of Coke and Disney are down. But business at both has grown dramatically... meaning it just might be time to pile money into the Nifty Fifty stocks again... So with earnings soaring, and the stock prices stagnant, these old Nifty Fifty shares are now cheap again – Disney sells for a price to earnings (P/E) of 13.6 times forward earnings and Coke for 17. It's not just Coke and Disney... Earnings for the New Nifty Fifty Index (NFT on www.bigcharts.com) as a group have increased by over 100% since 1999... But the index is down since 1999. As a result, valuations have been cut in half... They're cheap! To explain just how cheap, Bloomberg lists the forward P/E ratio of the overall stock market at 16.25 (that's the S&P 500). But the forward P/E of the New Nifty Fifty Index is only 12.79. It's hard to believe the Nifty Fifty won't return to a premium to the overall market for one simple, brutal reason: Most companies won't be around in 25 years. But I'd sure bet that in 25 years, families will still take their kids to Disney. And folks will still drink Coke. I sincerely believe that, after nine years of terrible performance, the New Nifty Fifty stocks will beat the overall market over the next few years, as they simply work their way back to a premium to the overall stock market. However, I can't fully endorse buying up all these household names just yet. As you can see from this chart of NFT, the uptrend just isn't there yet.
Good investing, Steve
Further Reading:
The Real 'One-Decision' Stocks You Should Own Market NotesNEW HIGHS OF NOTE LAST WEEK Patriot Coal (PCX)... coal Massey Energy (MEE)... coal International Coal (ICO)... coal Alliance Resource (ARLP)... coal Tesco Corp (TESO)... oil services Pioneer Drilling (PDC)... oil services Bronco Drilling (BRNC)... oil services Potash Saskatchewan (POT)... fertilizer Rex Energy (REXX)... oil & gas GMX Resources (GMXR)... oil & gas Clayton Williams (CWEI)... oil & gas Abraxis Petroleum (ABP)... oil & gas Whiting Petroleum (WLL)... oil & gas Compton Petroleum (CMZ)... oil & gas San Juan Basin Royalty (SJT)... natural gas royalties Anheuser-Busch (BUD)... beer Central European Distribution (CEDC)... vodka Corn, Crude oil, Natural gas, Ethanol NEW LOWS OF NOTE LAST WEEK AIG (AIG)... insurance Barclays (BCS)... banking Bank of America (BAC)... banking Black & Decker (BDK)... tools Goodyear Tire (GT)... tires Nokia (NOK)... cell phones Heelys (HLYS)... roller shoes MGM Mirage (MGM)... casinos Pfizer (PFE)... Big Pharma Merck (MRK)... Big Pharma Bristol-Myers (BMY)... Big Pharma Pacific Ethanol (PEIX)... Big Boondoggle Cooper Tire & Rubber (CTB)... tires Sears Holding (SHLD)... holding co Imperial Sugar (IPSU)... refined sugar Weyerhaeuser (WY)... paper products International Paper (IP)... paper products General Electric (GE)... conglomerate Whole Foods (WFMI)... expensive groceries Tata Motors (TTA)... India's largest automaker China Southern Airlines (ZNH)... China's largest air carrier Veolia Environnement (VE)... world's largest water stock Lead, Zinc |
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