DJIA 9054.65 +3.74 (+0.04%) S&P 500 1109.52 +3.70 (+0.33%) Nasdaq 1845.87 +14.25 (+0.78%) Value Line ndx 971.25 +3.86 (+0.40%) 30-Year Bond 102 22/32 -3/32 5.93% Yield
Hot Topic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HOTT)") else Response.Write("(Nasdaq: HOTT)") end if %>, a mall-based retailer of T-shirts and gift items for Gen-Xers and teeny-boppers, added $2 1/8 to $23 1/8 after reporting Q1 EPS of $0.01, beating the First Call mean estimate of a loss of $0.02 per share. Net sales climbed 54.8% to $17.3 million in the quarter, helping the firm record a profit in the first quarter of a fiscal year for the first time in its nine-year history. The company also announced plans to increase the number of new stores to be opened in fiscal 1998 to 45 from an originally planned 40. Some 15 of the new stores were opened during Q1, including the first Hot Topic stores in Louisiana, Maine, and Oklahoma. The company currently operates 125 stores in 35 states, selling licensed music-related items and its own line of Morbid Threads apparel and Morbid Metal body jewelry.
Landover, Maryland-based grocery store operator Giant Food <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GFS.A)") else Response.Write("(AMEX: GFS.A)") end if %> rose $5 to $42 11/16 after agreeing to be acquired by Dutch food retailer Royal Ahold <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHO)") else Response.Write("(NYSE: AHO)") end if %>, which gained $2 to $34 3/16. As part of deal, Royal Ahold will acquire all of Giant's outstanding Class A Non-Voting shares, including 11.8 million held by Britain's J. Sainsbury PLC, in a tender offer at $43.50 per share. Royal Ahold will add Giant to its stable of U.S. grocery stores, which includes BI-LO stores in the Southeast and New England's Stop & Shop chain, an old favorite of former Fidelity Magellan fund manager Peter Lynch. The deal makes Royal Ahold the fifth largest supermarket operator in the U.S. in terms of revenues, behind Kroger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KR)") else Response.Write("(NYSE: KR)") end if %>, Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, Safeway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>, and American Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASC)") else Response.Write("(NYSE: ASC)") end if %>.
It was another stellar day for initial public offerings as investors continue to snatch up shares of new issues. L-3 Communications Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLL)") else Response.Write("(NYSE: LLL)") end if %> rose $4 5/8 to $26 5/8 after selling 6 million shares at $22 per share, higher than the estimated price range of $18 to $20 per share. The New York-based company was formed by the spin-offs of the secure communications equipment businesses of Lockheed Martin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LMT)") else Response.Write("(NYSE: LMT)") end if %> and Loral Space & Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOR)") else Response.Write("(NYSE: LOR)") end if %>. Meanwhile, Blue Rhino Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RINO)") else Response.Write("(Nasdaq: RINO)") end if %>, a refiller of propane barbecue tanks, charged ahead $2 1/2 to $15 1/2 from an IPO price of $13 per share. Also, Great Lakes Bank parent GLB Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GLBK)") else Response.Write("(Nasdaq: GLBK)") end if %> moved up $2 5/8 to $15 5/8 in its first day of trading after selling 1.3 million shares at $13 per share.
QUICK TAKES: Online service provider America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> tacked on $4 9/16 to $87 11/16 after announcing an agreement with camera and photographic film maker Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> to deliver photos to AOL members via the Internet. AOL also said it had invested an unspecified sum in Kodak's PictureVision unit... DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> moved up $1 7/16 to $82 3/16 after the chemical company said it would buy drug maker Merck's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> 50% interest in the DuPont Merck Pharmaceutical Co. joint venture for $2.6 billion... Home improvement retailer Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %> gained $2 7/8 to $73 after reporting Q1 EPS of $0.45, beating the First Call mean estimate of $0.42. In a conference call covered by Reuters, president and CEO Arthur Blank said the company was "committed" to 23% to 25% EPS growth in fiscal 1998.
Router and computer networking products maker Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> moved $2 5/8 higher to $80 3/8 after Cowen & Co. analyst Christopher Stix reiterated his "strong buy" rating on the stock yesterday... Financial software concern Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> gained $4 3/8 to $49 3/8 after reporting a Q3 loss of $0.05 per share, which includes an acquisition-related charge of $4.0 million and a $16.2 million charge for the company's agreement to provide content for America Online's Personal Finance area. Net of these charges, the company crossed the Q3 finish line with EPS of $0.20, compared with the IBES forecast of 0.17... Piping systems and construction services provider Shaw Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGR)") else Response.Write("(NYSE: SGR)") end if %> rose $1 1/2 to $24 3/4 after Dain Rauscher Wessels upgraded the company to "strong buy" from "buy."
Cable set-top box maker General Instrument Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> moved up $1 5/8 to $25 1/4 after signing an agreement with Oracle's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> affiliate Network Computer Inc. to enable and market NCI's DTV Navigator software and port it to General Instrument's interactive digital set-top box... Pharmaceutical developer COR Therapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CORR)") else Response.Write("(Nasdaq: CORR)") end if %> rose $9/16 to $17 7/16 after its Integrilin drug for treating unstable angina was approved for marketing by the FDA. The drug is the only product in its class approved for treating both unstable angina and percutaneous coronary intervention... Citizens Utilities Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CZN)") else Response.Write("(Nasdaq: CZN)") end if %> picked up $7/8 to $11 7/16 after saying it would separate its telecommunications businesses and its natural gas, electric, and water distribution businesses into two separate, publicly traded companies within a year.
Utility software developer Symantec Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMC)") else Response.Write("(Nasdaq: SYMC)") end if %> tacked on $3 to $32 1/8 after announcing a plan to license anti-virus technology from IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> and combine it with its own technology to produce a single family of anti-virus products. In exchange, IBM will assign its existing anti-virus contracts with OEMs to Symantec... Supply chain management software firm Manhattan Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MANH)") else Response.Write("(Nasdaq: MANH)") end if %> climbed $3 1/8 to $21 after Deutsche Morgan Grenfell and Hambrecht & Quist both started coverage with a "buy" rating... FileNET Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FILE)") else Response.Write("(Nasdaq: FILE)") end if %> rose $3 23/32 to $58 23/32 after the document management software company's board approved a two-for-one stock split payable on or around June 12.
Business computer security services firm Axent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AXNT)") else Response.Write("(Nasdaq: AXNT)") end if %> rose $3 3/32 to $25 27/32 after Prudential Securities reiterated its "buy" rating on the stock with a 12-month price target of $37 per share... Interactive entertainment software developers got a boost today as Bear Stearns started coverage of several firms in the sector. Electronic Arts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERTS)") else Response.Write("(Nasdaq: ERTS)") end if %> received a "buy" rating and rose $2 5/16 to $46 7/16, while GT Interactive Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTIS)") else Response.Write("(Nasdaq: GTIS)") end if %> was deemed "attractive" and increased $1/2 to $10 1/2... Xilinx Inx. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XLNX)") else Response.Write("(Nasdaq: XLNX)") end if %> gained $2 3/16 to $47 1/4 after announcing its new QPRO Line of programmable logic devices and gate arrays for the aerospace and defense markets... Chase Manhattan Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> rose $2 5/8 to $144 7/8 after the "money center" bank's shareholders approved a two-for-one stock split.
Printed circuit board and contract electronics manufacturer Sanmina Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SANM)") else Response.Write("(Nasdaq: SANM)") end if %> tacked on $2 15/16 to $84 15/16 after setting a two-for-one stock split payable on or about June 10... Thin film wafer fabrication systems maker Novellus Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NVLS)") else Response.Write("(Nasdaq: NVLS)") end if %> gained $1 7/16 to $43 7/8 after announcing an agreement with wafer fabrication equipment supplier Lam Research Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LRCX)") else Response.Write("(Nasdaq: LRCX)") end if %> to develop etch and deposition technologies for copper interconnect products... Pharmaceutical company Medarex Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEDX)") else Response.Write("(Nasdaq: MEDX)") end if %> rose $15/32 to $7 29/32 after saying the Phase II trials of its MDX-210 cancer treatment indicate the drug has helped minimize prostate and kidney cancer in patients who had not responded to all standard treatments.
Biopharmaceutical company Scios Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCIO)") else Response.Write("(Nasdaq: SCIO)") end if %> sank $1 11/16 to $10 11/16 after jointly announcing with Wyeth-Ayerst Laboratories, the drug division of American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %>, that they have suspended enrollment in their North American clinical study of Fiblast for use in acute stroke. The temporary suspension comes at the recommendation of an independent data and safety monitoring committee. Although enrollment in the study could resume within several months, the ultimate outcome of the committee's review is uncertain. Scios has yet to have a drug approved by the Food and Drug Administration -- it submitted a new drug application for its Natrecor for treating congestive heart failure only three weeks ago.
Fast food restaurant operator Boston Chicken <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOST)") else Response.Write("(Nasdaq: BOST)") end if %> was skinned again today, losing $1 7/32 to $3 1/32 after reporting a first quarter loss of $4.38 a share (after charges), which was more than the loss of $0.69 per share expected by analysts. In addition, the company, which was trading around $20 this time last year, said it may not meet its previously stated objective of $75-$100 million in systemwide cash flow this year. Early last June Boston Chicken was featured as a Daily Trouble along with its majority-owned subsidiary Einstein/Noah Bagel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENBX)") else Response.Write("(Nasdaq: ENBX)") end if %>, which fell $1/2 to $4 15/16 today. The biggest Q1 hit for Boston Chicken came from the establishment of a $202 million provision for potential loan losses on top of the $128 million provision taken in the previous quarter. Up until Q4 the firm had not taken loan loss reserves each quarter, which would have conservatively accounted for the majority of the company's assets. As the area developer and store-level economics have deteriorated, the company has fallen flat on its face. However, turnaround specialist CEO Michael Jenkins claims that ending the barrage of coupons and discounting will help to restore unit level economics and a brighter future.
QUICK CUTS: No. 3 long-distance carrier Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> was disconnected for $3 3/16 to $70 13/16 after announcing that the company and its three cable partners have "made substantial progress" in their negotiations on the change in ownership structure of Sprint PCS, under which Sprint would acquire full ownership of the wireless business... Cigar manufacturer Swisher International Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWR)") else Response.Write("(NYSE: SWR)") end if %> was smoked for $1 7/8 to $9 11/16 after yesterday announcing that it expects Q2 EPS to fall below the $0.31 reported for the year-earlier period and below analysts' estimates. The projected shortfall is due to continuing oversupply of cigars and weak sales of chewing tobacco and moist snuff... Beauty products direct seller Avon Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVP)") else Response.Write("(NYSE: AVP)") end if %> fell $2 3/4 to $84 13/16 after Merrill Lynch cut its short-term rating on the company to "accumulate" from "buy" while maintaining a "long-term buy" rating.
Lighting systems designer and manufacturer SLI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLI)") else Response.Write("(NYSE: SLI)") end if %>, formerly Chicago Miniature Lamp, fell $4 3/16 to $32 1/4 after reporting Q1 EPS of $0.30 per share, up from $0.18 (before unusual items) in the year-ago period. The Zacks mean estimate for the quarter was $0.23. Raymond James downgraded its rating on the company to "neutral" from "buy"... Specialty chemicals company M.A. Hanna Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAH)") else Response.Write("(NYSE: MAH)") end if %> slid $3/4 to $21 after warning that second quarter earnings could be flat compared with first quarter earnings and lower than Q2 1997... Video communications products developer C-Phone Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFON)") else Response.Write("(Nasdaq: CFON)") end if %> shed an additional $15/16 to $6 23/32 in the aftermath of its frenzied run-up to $10 3/8 Thursday after announcing the launch of a set-top box to provide Web access via TV using an analog phone line.
Business software developer System Software Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SSAX)") else Response.Write("(Nasdaq: SSAX)") end if %> dipped $7/16 to $8 5/8 after warning after the bell yesterday that it expects to report a loss in the second quarter. Wall Street had been predicting EPS of $0.07... Physician networks and primary-care health clinics operator PHP Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPH)") else Response.Write("(NYSE: PPH)") end if %> fell $1/2 to $9 3/8 after The Wall Street Journal's "Heard on the Street" column reported that a dispute with convertible preferred stock holders over whether the company has to pay default payments of about $0.15 a share and other woes may be "hazardous to their [shareholders] health"... Footwear distributor and retailer Genesco Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GCO)") else Response.Write("(NYSE: GCO)") end if %> lost $1 1/8 to $15 5/16 after reporting Q1 EPS of $0.14 compared with $0.08 for the prior-year period and the Zacks mean estimate of $0.09.
Data storage company Advanced Digital Information <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADIC)") else Response.Write("(Nasdaq: ADIC)") end if %> slid $13/16 to $17 9/16 after reporting Q2 EPS of $0.20, a penny less than the year-ago quarter. Zacks mean estimate was $0.25... Physician practice management firm FPA Medical Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FPAM)") else Response.Write("(Nasdaq: FPAM)") end if %> lost another $1/2 to $4 3/16 as shareholders lodged several separate class action lawsuits against the company and its officers for making false and misleading statements about the company's performance. The company's shares have plummeted since last Friday when it reported lower-than-expected earnings and announced that it expects to take up to $200 million in charges in the second quarter.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Nifty Fifty Revisited
Stocks for the Long Run by esteemed Wharton professor Jeremy J. Siegel has been a popular book around Fool HQ for a couple years. It's been so popular, in fact, that we've somehow "lost" the 1994 edition. Luckily, the 1998-copyrighted second edition has just been released. Subtitled "The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies," the book benefits from Siegel's years of teaching at one of the country's most respected colleges of finance and it is an excellent introduction to common stock investing for beginners with an acquaintance with statistics or for the more advanced who are looking for a good resource on stocks.
Perhaps the most interesting part of the book is chapter 7, "The Nifty Fifty Revisited." The Nifty Fifty was a group of stocks that people believed could be bought at any price because their earnings growth was so dependable and robust that the valuations at which they were purchased mattered little for those looking to hold for the long term. The experience with the Nifty 50 "one-decision" stocks over the past 25 years has been cited whenever someone wants to make the point that you can overpay for "great companies." Sure enough, that is true, but sometimes you can't pay enough for the truly great companies.
Siegel's evaluation of the data starts out with the rhetorical question, "Did the Nifty Fifty stocks become overvalued during the buying spree of 1972?" "Of course they did!" many will scream. It's become the accepted wisdom among the perma-bear crowd and the "value" cranks that the Nifty Fifty episode was the height of insanity, a modern-day tulip mania. Siegel answers the question in the affirmative, but says that these stocks were overvalued "...by a very small margin." As we have repeated God knows how many times now, a truly great company priced at its intrinsic value will always look horribly overvalued in relation to its current earnings. In other words, you can pay outrageous multiples to current sales and earnings and still outperform or perform in-line with the market if you had perfect foresight on the company's future returns on capital and capital allocation policies. No one has perfect foresight, though. In lieu of that, you have to find companies with excellent economics.
A company priced at its intrinsic value is priced such that its total return over a given time period in the future will be equal to the return of the market in general. This is an assumption I make in my somewhat controversial columns on Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>. I argue that its current price/sales and price/earnings ratios are irrelevant, because the market is not discounting those numbers -- it is discounting the future financials. Of course, the market is only guessing at how the company will do, while I make no claim whatsoever as to whether the company is priced above, at, or below its intrinsic value. According to the data Siegel presents, the market can overprice favorite stocks, but it can also severely underprice other investor favorites. Intrinsic value is not easily calculated.
Between December 1972 and June 1997, the Nifty Fifty generated a compound annual return (CAR) of 12.4%, without re-balancing the portfolio. Rebalancing monthly, the portfolio of Nifty Fifty stocks returned 12.7% per year, compounded, over this time period. How did the S&P 500 do? 12.9% compounded annually. (All of these are total returns, which include dividends reinvested.)
Some lessons to draw from the group should be remembered, though. 1) You can't pay any price for any stock that the consensus deems to be "great." Phil Fisher raves about Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> in Common Stocks, Uncommon Profits. In the post-war world, this was a killer company. However, its returns to shareholders before the peak of the Nifty Fifty era were not matched by its post-Nifty Fifty peak performance. During the period of the study, Texas Instruments generate a CAR of 9% per year. From 1972 to 1995, the company's CAGR in per-share earnings was 12.7%. Since its EPS outgrew the return on the stock, the data indicate that the company ended the 25-year period at a P/E lower than the 39.5 time earnings at which it started the period.
To get to intrinsic value of the company at the beginning of the period, Siegel presented a "warranted P/E ratio" for the companies in the Nifty Fifty. At this price, each would have performed in-line with the S&P 500 over the ensuing 25 years. Texas Instruments should have been priced at 19.4 times earnings in January 1972 to match the market over that period. Calculators, aerospace, and DRAM chips made the early owners of TI quite rich, but the latecomers overpaid.
What about some of the companies that would be included in the Nifty Fifty today? Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, which has generated a compounded annual return of about 16.5% since going public in 1919, generated a CAR of 17.2% during the period encompassed by Siegel's study -- nearly in-line with its 78-year historical performance. Did Coke need to be priced at a level only a "value investor" could appreciate? Hardly. At a P/E of 46.4, some insight into the excellent economics of Coke would have steeled the nerve of a potential buyer. According to Siegel's data, the company would have to be priced at a ridiculous-looking 92.2 times earnings in 1972 to have performed in-line with the S&P 500 over the ensuing 25 years.
It does help that Coke's earnings power was expanded greatly by the introduction of the blockbuster Diet Coke during the time period covered by the study, though one could argue that the performance of that drink could attributed to the inherent power of the Coke brand. It also helps that Coke is valued at nearly the same level now as the level at which it was priced in 1972. If Coke were priced at 10 times earnings and inflation were now running at 9% annually, the CAR of the stock would be much, much lower. Priced currently near 50 times earnings, the company's CAR of 17.2% has actually run ahead of Coke's 13.5% annual EPS growth rate (though the composition of earnings per share may be different in the two periods).
What may be surprising to some is that Coke is not it when it comes to being the winning stock in the Nifty Fifty. Cigarette and foods company Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> won the contest with a 19.9% CAR from January 1972 to June 1997. During that period, the company grew EPS at a compounded annual rate of an amazing 17.9%. Starting out with a P/E of 24, the company could have been priced at 78 times EPS to have performed in-line with the S&P 500 over the following 25 years.
Philip Morris could have been priced at 50 times earnings and easily refuted the dour warning of Forbes magazine in 1977: "It was so easy to forget that probably no sizable company could possibly be worth over 50 times normal earnings. As the late Burton Crane once observed about Xerox, its multiple discounted not only the future but also the hereafter." Oh, what a joyous place America was in the post-Watergate Carter era. Forbes hedges its bets a bit, saying, "probably no sizeable company." In the period covered by Siegel, not only Philip Morris outperformed, but so did Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>, Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %>, PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>, Bristol-Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %>, Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>, General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, and Procter & Gamble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %>. Of these stocks, an investor could have paid anywhere up to 50 times earnings and still outperformed the market.
Now, this isn't advice to pay anything for any stock. Let me make this clear right now. Most companies possess crappy economics that cannot outperform the S&P's collection of the best and brightest 500 large companies that are traded in the U.S. Most companies are not worth owning at anything but the cheapest price, while some companies are merely attractive at current market multiples. Even the best companies bought at very high current valuations can turn in discouraging performance over a five or even 20-year span. The current state of the market bails us out on looking at compounded annual returns of these companies because valuations are high today. However, we are measuring peak-to-peak (if this is a peak, which I have no idea about) performance, not trough-to-peak as some do to boost representations of returns. At both ends of the Siegel study, stocks were "expensive."
It's interesting to note that most of the Nifty Fifty underperformed the market over the ensuing 25 years. That's pretty much always the case. Over time, the companies with good economics spank those with mediocre to poor economics. As with any portfolio of stocks, there will be winners and losers. The trick to outperforming the market is to identify those companies with poor economics and not pay a high price for them. Identifying those companies with excellent economics and at least a competent to good to brilliant management team is more than half the battle in beating the S&P 500. "Value" is a component of growth, not just price. You HAVE to be right about quality, but sometimes it's hard to pay too much for excellent quality.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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