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The 20th century saw rise to almost all of the great companies in the world today. In fact, the majority of the companies that we now consider to be world leaders did not exist at the outset of the century. Only one of the companies currently listed on the Dow Jones Industrial Average, General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, was also on the list in 1901. All of the others have been added in the interim.
And that's appropriate, for the American economy has transformed from being dependent on heavy industry and manufacturing, through the periods of development of mass communications, transportation and construction, through two enormous war efforts, the computer age, and finally the advent of globalization and the Internet. The world has endured more change in this last century than in the previous five centuries combined.
Whereas in 1900 it was an all day trip to travel from San Francisco to Oakland, now it is possible to wake up in North Dakota and go to sleep in South Africa in a single day. Whereas long-distance communications was once only available to the chosen few, now billions of dollars and trillions of bits fly effortlessly around the world every day, without heed of borders, oceans, or natural barriers. Local brands and shops have been replaced by multinational brands and chains, to the point that Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> is as much at home in Yemen as it is in Idaho, and more people have heard of Nokia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK)") else Response.Write("(NYSE: NOK)") end if %> than have heard of Finland, its country of origin.
The companies that make up the components of the FOOL 50 (originally called the NOW 50) are in the vanguard of the trends that will define commerce in the next decades. They possess a gold-plated brand name, a tradition of innovation, a superior use of technology, and a culture of accountability to their shareholders. They also, as a group, represent the globalization of the American economy. The FOOL 50 contains 8 companies that are domiciled outside of the United States and an additional 19 that are American companies that derive more than 50% of their income from international operations. As the economies of the world continue to meld into one, we expect that more and more this index will reflect the composite nature of the global marketplace.
When we announced the names of the companies that would be included in the list, we received a significant amount of feedback from Fools asking about the process of inclusion, the valuation methodology, and the review for replacement. In regard to the valuation, we offer an additional article that contains all of the required information. For the other issues, we can address them here.
Process of Inclusion: The FOOL 50 trustees received more than 2000 nominations via e-mail and on the FOOL 50 Message Board with a total of 288 companies being nominated. We worked on a rolling analysis basis, so that we could eliminate those companies that had been nominated but were most demonstrably lacking in meeting the criteria for inclusion on their own individual merits. This process was repeated until we had completed a list of approximately 70 companies. From this list the Trustees held a series of open forum debates followed by closed ballot voting. This continued until each company had either been included as one of the 50 or eliminated.
Of the companies that are not included in the final list, the last ones eliminated were Gateway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %>, First Data Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDC)") else Response.Write("(NYSE: FDC)") end if %>, Corning <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLW)") else Response.Write("(NYSE: GLW)") end if %>, Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>, eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %>, JDS Uniphase <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDSU)") else Response.Write("(Nasdaq: JDSU)") end if %>, Nortel Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>, SAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %>, Vodaphone <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VOD)") else Response.Write("(NYSE: VOD)") end if %>, Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %>, Southwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %>, and Bristol Myers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %>. All of these companies are quite spectacular, and are likely to be solid long-term investments. They also are among those that are most likely to replace one of the existing FOOL 50 companies should such an action be deemed necessary in the future.
Survivorship Bias/Review: The NOW is designed with the intention of being an index, not a portfolio. In doing so, we have placed a fairly stringent limitation on our own ability to replace stocks. Still, the S&P 500 has made 49 replacements in the last 5 years, and recently the Dow Jones Industrials waved good-bye to 4 laggards and replaced them with more representative companies. So, we do expect there to be some transitory nature to the stocks that are included.
Our review period will be annual, commencing on the Foolish holiday of April 1 each year. In this period the Trustees will review the companies included and identify any that have ceased to meet the criteria, or that have been surpassed by more relevant companies outside of the FOOL 50. In the majority of cases we will "flag" companies that are lacking and review them again the following year. In certain cases we will move to replace a company immediately if circumstances strongly indicate it is no longer a leader in its field and it does not show any sign of recovery. We'll call this the Iomega Exception. Should two companies in the Index merge, or should one merge with a company outside of the index as the acquired company, a review will be made immediately and if need be a replacement component company will be named, with recalculations being done at that time.
Corporate Actions: As explained in the valuation article, the FOOL 50 is a market cap weighted index. We've done this to remove some of the difficulties that arise from corporate actions such as mergers, spin-offs, stock splits, and dividends. Each company is assigned a weight in the index based on its market capitalization. This weight will be recalculated each quarter on March 15, June 15, August 15, and December 15. The current values are based upon the market caps for each company as of December 15, 1999. If a company has a spin-off, it will have a smaller market cap and thus be recalculated lower at the next recalculation, just as it would increase through a merger. Dividends will be ignored for the purpose of calculation of gains for the index.
Should You Invest in the FOOL 50?
The FOOL 50 is an index, not a portfolio, and definitely not a list of recommended stocks. This is an important distinction. Indices are set up to measure the market or some segment of the market, not necessarily to beat it. Just because Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> is a Dow stock doesn't mean that the editors of The Wall Street Journal -- the folks who choose the Dow's components -- think you should buy Disney. It's there to represent U.S. entertainment companies.
When we selected stocks for the FOOL 50, we gave no consideration as to whether a company was "overvalued" or "undervalued." Certain stocks on the final list have enjoyed immense appreciation of value over the last year, while some have declined in value. Our focus has been on the businesses themselves, and whether those businesses are representative of the best companies in the world.
While we think that the FOOL 50 companies will prosper over the next several decades, it is doubtful that all of them will; some of them could be rather bad investments in the short-term, especially since many FOOL 50 companies are very highly valued, selling at high P/E multiples. A great company is not necessarily a great investment if you buy it when it's selling for far more than it is worth.
If you want to invest in FOOL 50 companies, please take this list as nothing more than a starting point and do your homework.
As always, we welcome your feedback on the FOOL 50 Index, either on the message board or by email at [email protected]. Starting today you will see the FOOL 50 included in several places on fool.com so that you may begin to track your portfolio performance against it. We will be rolling out additional features in the months to come, and will begin periodical features on the included companies.
Finally, we have produced a brief description of each component company in the FOOL 50. We hope you will be inspired to learn more about these companies and to try to find those gems out there that will help you "Beat the FOOL 50" with your own portfolio.
Enjoy!
-Bill Mann
ARM Holdings AT&T America Online American Express American International Group Amgen Applied Materials Automatic Data Processing Berkshire Hathaway Biogen Cable & Wireless Charles Schwab Corporation Cisco Systems, Inc. Citigroup Coca-Cola Costco Wholesale Corp. DaimlerChrysler Corp. Dell Computer DuPont EMC Corporation ExxonMobil First Data Gap Inc. General Electric HSBC Holdings plc Home Depot Hughes Electronics IBM Intel Corp. Johnson & Johnson McDonald's Medtronic Merck & Co. Microsoft News Corp. Nokia Corp. Oracle Pepsico Pfizer Philip Morris Procter & Gamble Schlumberger Sony Southwest Airlines Sun Microsystems Texas Instruments Time Warner United Parcel Service Wal-Mart Yahoo!
The Motley Fool FOOL 50 Index
Click on a company name for information and links.
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