Friday, June 27, 1997
The Not So Nifty
Fifty
Or
Leisure Suits, Disco, and Bear Markets
by TMF Runkle
TMF Runkle
Many times opponents of the "Buy and Hold" method of investing will bring up the fabled "Nifty Fifty" of the early seventies. These were stocks suitable for "widows and orphans" that you could buy and forget. Stocks such as AT&T, IBM, Xerox, Avon, Coca-Cola, and Polaroid were on this list. The problem was that too many people liked these stocks, and they ended up with some sky high PE's. Polaroid had a PE of 66 in 1973.
What happened? Two things, we went into a long-term bear market, and all of a sudden investors didn't think that the Nifty Fifty were that nifty. Stock prices stagnated and plummeted. The most familiar "Buy and Hold" bogey man is what happened to the Three Stooges of the Nifty Fifty, Polaroid, Avon, and Xerox. If you bought Polaroid in 1973 for a split-adjusted $63.50 (which was not the highest it went), you still would be sitting on a loss today, 24 years later. Avon would be doing a little better; you'd have made $3 a share or so in 24 years, and with Xerox you would be up about $16 a share. By the way, that $16 a share for Xerox would give you an annualized return of 1%.
This is rather disturbing to those of us who buy blue-chip stocks and want to just hold them. Are we wrong? Should we take up Technical Analysis? Should we dump our shares of Procter and Gamble and buy Zitel? I was curious to see if I could find out why these Three Stooges did so badly, so I took a trip to the Carnegie Library in downtown Pittsburgh.
Was there some obscure reason that these stocks did so poorly? No, not really. Quite bluntly, their earnings from 1973 onward stunk for many years. Below is a table of their earnings compared to my current favorite over-valued stock, Coca-Cola. It doesn't tell the whole story though. These three companies have had very volatile earnings in the past 24 years. There was no consistent earnings growth. Coca-Cola, on the other hand, showed consistent growth in earnings. Only in 1992 did it show a drop in earnings, because the previous year included a one-time gain on the sale of Columbia Pictures. Take a look at this:
A = 1973 P/E Ratio
B = 1973 Price (split-adjusted)
C = 1996 Price
D = Annualized Price Appreciation Since 1973
E = Annualized Earnings Growth Since 1973
Stock A B C D E
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Polaroid 66 63.50 51.00 1% 4%
Avon 42 63.50 66.38 0.2% 3%
Xerox 38 51.67 67.25 1% 4%
Coca-Cola 37 1.35 67.75 17% 14%
Coke's PE back then wasn't too much lower than its PE now. Before you people who are bullish short-term on Coke feel vindicated, it went through stagnant share price growth until about 1983. Its earnings had to catch up with that high PE. The same could happen today. However, if you bought Coke back then, and held it through that period, you'd have done fine.
What does this tell us today? First, if you are going to buy a blue-chip company with a high PE, like Coca-Cola or Procter & Gamble, make sure you have a very long time horizon. If your daughter is going to college in two years, don't put that money in either of those companies. Actually, a two-year horizon is probably too short for stocks anyway; T-Bills or CDs might be more Foolish. Also, hold the stock you buy only as long as earnings are consistently rising. If they become volatile year to year, dump the stock. A high PE stock will be punished severely for earnings drops.
While the Nifty Fifty weren't so nifty for investors through the rest of the seventies, looking at them long-term, the good companies did come around. You know something else I noticed in downtown Pittsburgh yesterday? Polyester is getting stylish again. In fact, I saw a young lady in a lime green polyester pantsuit. Throw in some (ugh) Disco music, and we'll know that what goes around really does come around.