The Real 'One-Decision' Stocks You Should Own

You've probably heard the story of the Nifty Fifty...

During World War II, American consumers were either working or fighting, and they didn't have a chance to spend all the money they were earning. So by the war's end, Americans had huge amounts of cash saved up.

In the late 1940s, dozens of new consumer products hit the market, made by companies such as Avon, Xerox, Coca-Cola, and Polaroid. This period marked the beginning of the new American prosperity and consumption... and it triggered a huge bull market in the stocks of the companies that made these products.

People described these companies as "one-decision" stocks because you'd simply make the decision to buy them and then never sell. They also called them the Nifty Fifty. This bull market lasted for almost 25 years, from 1949 to 1972, and ranks alongside 1929 and 2000 as the greatest bull markets in stock market history.

By the end of 1972, the prices of these stocks had risen to insane valuations. Xerox, for example, was trading for 49 times earnings, Avon for 65 times earnings, Polaroid for 91 times earnings... Coca-Cola's stock reached a P/E of 42 and a stock price of $75.

You probably know what happened next, too...

The market crashed for two years and then stagnated for another eight. But while stocks stagnated, corporate America kept growing its sales, earnings, and dividends... Take Coke and GE as examples:

Between the 1972 highs and 1974 lows, Coca-Cola fell 84%. In 1974, you could have bought Coca-Cola stock for as low as $22. By 1982, you could still have bought Coca-Cola for less than $30.

While Coca-Cola's stock did nothing for eight years, Coke's business performed really well: Earnings doubled, sales rose 166%, and the dividend went up 158%.

General Electric was another Nifty Fifty stock. While the stock price fell 32%, revenues went up 88%, earnings rose 125%, and dividends climbed 111%.

A stock price can stay irrational for only so long. By February 1982, the stock prices of Coke and GE were ready to reflect the huge surge in earnings and dividends they had accumulated over the preceding eight years.

And that's exactly what happened:

Between February 1982 and February 1986, Coke stock jumped from a split- and dividend-adjusted 69 cents to $2.69... a gain of 290%. Same story with GE. Between February 1982 and February 1986, GE's stock jumped from split- and dividend-adjusted 66 cents to $1.91... a gain of 189%.

Why am I telling you about these Nifty Fifty stocks? Because, right now, I’m seeing the exact same setup conditions... in the exact same stocks.

Look at Coca-Cola. Since October 2000, KO investors have made a total return (including dividends) of 6%. Meanwhile, its revenues are up 28%, its earnings are up 156%, and its dividends have risen 100%.

Or what about GE? Including dividends, investors have lost 9.5% since October 2000. Yet its revenues are up 146%, its earnings have gained 66%, and its dividends are up 104%.

I chose Coke and GE randomly. Look at any American blue-chip stock – the sort that carry AAA ratings and beat the market year after year – and you’ll see similar patterns.

No two market periods are exactly the same. So you have to be wary of historic comparisons. However, when I consider how great these businesses have performed and how sluggish their stock prices have been over the last seven years, I conclude that stock prices will soon catch up with fundamentals... just like they did in the early 1980s. It may not happen tomorrow, but it will happen. And I want to own these stocks when it does...

Good investing,

Tom