Fool Portfolio Report
Thursday, April 3, 1997
by Jeff Fischer (MF BudFox)
ALEXANDRIA, VA., (April 3, 1997) -- There was a group of stocks which you could buy and hold forever. These were called "one decision stocks." The popularity of these particular companies grew to the point where multiples were pushed far above the companies' growth rates. Still, people bought the stocks without regard for valuation. The stocks continued to rise. Companies expected to grow 15% annually traded at more than 40 times earnings. Eventually the stocks tumbled over a two year period.
All of the first paragraph describes the early 1970's and the mid-1990's, equally. Only the last sentence hasn't carried over to the 1990's. Stocks haven't tumbled 45% as they did in 1973 to 1974. Far from tumbling, the S&P is still in positive territory this year, and is only down 8% from the recent high. Still, there are similarities between the "Nifty Fifty" stocks (those select companies which everyone bought to "hold forever" in the early 1970's), and a well-known group of stocks in the 1990's. Many market watchers claim these new stocks have emerged, dangerously, as the "ruling class," ear-marked as stocks which novices believe you can buy at will. Many of the companies we've written about glowingly here, and many of them have been purchased by more than few Fools that I know of, just recently.
Looking at then and now: In the 1970's the stocks which comprised the Nifty Fifty included Avon Products, Sony, Polaroid, Disney, Clorox, Kodak, International Flavors, and Mcdonald's. The multiples some reached at their peaks are below. Consider that most the companies were growing earnings well less than 20% per year:
1972 P/E (Price-to-Earnings multiple) Sony 92 McDonald's 83 Intl. Flavors 81 Walt Disney 76 Avon 64 Clorox 49
Avon, growing around 17% per year, hit a high multiple of sixty-four times earnings before the stock fell 80% over the next two years, in 1973 to 74. Mcdonald's and Disney suffered similar mind-bending falls, though not as steep. Can investors learn from history, and if so, what is to be taught right now? Below are the stocks that are considered the new "Nifty Fifty" by many, and their current price to earnings valuations:1997 P/E Coca-Cola 39 Gillette 44 Walt Disney 34 Hewlett-Packard 19 J&Johnson 25 Intel 24 3M Co. 23
These numbers don't appear nearly as intimidating as those in 1972. Though admittedly some appear lofty by their own measure, regardless of the 1970s. Looking at anticipated annual growth rates and forward multiples on earnings estimates for the fiscal year:1997 Growth Rate P/E on Est. Coca-Cola 18% 33 Gillette 17% 28 Walt Disney 18% 26 Hewlett-Packard 17% 16 J&Johnson 15% 21 Intel 20% 16 3M Co. 10% 20
Bluntly put, none appear outrageously priced. In fact, Intel and Hewlett Packard can be questioned as to whether they're undervalued. Only Coca Cola, Gillette and Disney catch my eye, with Coca Cola trading at a forward multiple nearly twice its anticipated growth rate, while the other two stocks trade at significant premiums as well. But these companies deserve premiums. Probably not two-times growth rate premiums, but certainly modest premiums. Intrinsic value needs be considered, as well as cash-flow and cash on hand, rather than merely the price-to-earnings measure. With more in-depth and more "accurate" valuations, you can argue that large, leading companies are often unfairly priced to the inexpensive side. MF Templar has written the opinion that the market over-values small-caps excessively, and undervalues cash-generating giants, largely by ignoring cash, for one, while using simpler valuation measures.
Either way, imagine that you had bought some "buy and hold forever" stocks in 1972, at the very peak. You bought Mcdonalds, Disney, and even Avon at the peak before its 80% tumble. The next two years you saw your portfolio get cut by around 70%.
Right now, had you "held forever" as you intended, you would still be outperforming the market on two of the stocks, and on Avon you would still have made very good returns. I don't have time at this writing to figure the exact returns, and will search that out later, but a quick glance shows that buying these stocks at their very peaks would have been smart in 1972, looking back now, 25 years later. Of course, it would have been smarter to buy them in 1974, or to buy them over a course of many years, but the point of looking back is -- related to now, with new "buy and hold forever" stocks sitting at the valuations they're now at... the point is, well, obvious.
Also, which must be considered: On a wider, macro-economic level, the similarities between the decades of the 1970's and the 1990's "clash," if that's possible. There are few. Currently the economy is strong and there are no signs of obscene inflation on the horizon. Stocks often fall due to a recession, which brings lower corporate earnings, or when interest rates rise to such levels that investing in the stocks of companies loses attraction in several different ways (one of them, again, being that rising rates portends a possible recession). But the rising Fed Funds rate doesn't directly affect the economy until mortgage rates and other "real-life" "mass-economy" rates rise substantially as well. Currently, mortgage rates are well in check around 8%, and the recent "pre-cautionary" Fed move is meant to help insure such rates remain in control, so the economy can grow at a healthy pace. If the Fed is doing its job, inflation won't become a problem, and the economy will continue to grow at a steady, sustainable pace, and the stock market with it, in time.
In 1994, with six Fed moves on the Fed fund rate, to above 6%, the 30-year bond rate rose above 8%, while stocks ended the year up a fraction, though down 9% from the high. Now the important bond rate hovers "merely" above 7%. Many are guessing that the Fed will make perhaps two to three more Fed rate increases, judging from an economy in fairly navigable waters. It's doubtful such action would send the 30-year bond rate soaring above the 8% mark reached in 1994, or send mortgage rates, et. al., soaring, either. Projecting the Fed's actions aren't easy, but looking at the economy, one does still get a sense of well-being. A slow-down of earnings from the past two years is understandable. The feared "boom to bust" cycle looks less likely, especially as so much of the world is just beginning to delve into the new "free-world" economy -- politically, financially, mentally, and physically.
That said, recessions are a natural part of every cycle. When they arrive, they arrive. They're often a window of time where you can buy some of the best companies at decent prices. And, looking at periods of rising rates and again at 1994, while the general market was flat, in actuality three out of four stocks lost 23% or more in value. It was a stealth bear market. Rising rates were much to blame.
Today the Fool gained a fraction (0.24%) on a strong performance from AMERICA ONLINE (NYSE: AOL). Rumors continue to circulate that AOL may try to court COMPUSERVE (Nasdaq: CSRV). Would AOL benefit from acquiring Compuserve? Perhaps the business-slanted audience of Compuserve is a market AOL could capitalize further upon. Sounds plausible. Just a rumor, though. No speculation here.
CHEVRON (NYSE: CHV) fell $2 5/8 after the cable television channel, CNBC, gathered analysts around a table and they proceeded to chat down oil stocks. That's what I read in the Fool's Lunchtime News, anyway. I didn't see it. Supposedly the outlook for oil stocks isn't all that great. We all know that, though. Oil is ever becoming a less important part of daily life. Nobody uses it anymore. Well, seriously, surely they had some reason. But my two penny bet is that the oil stocks recover within a matter of days. The "CNBC Effect" is usually brief.
LUCENT TECH (NYSE: LU) rose $1 3/4 after pre-announcing Q2 earnings per share of $0.09 to $0.10, well above estimates of $0.04, due to strong results in software and higher-margin wireless telecom equipment. Good for Lucent. Glad to see it thriving, now free of AT&T.
Large stocks and the Dow fell again today, at one point sharply. The Dow has dropped around 500 points in the last few weeks. Perhaps some of the new "Nifty Fifty" stocks have gotten ahead of themselves. Some are probably over-heated, right now. But looking five years out, while projecting reasonable growth, many of these leading stocks would appear to be bargains.
Stock Change Bid -------------------- AOL + 7/8 45.50 T - 5/8 33.75 ATCT - 5/16 5.63 CHV -2 5/8 64.38 GM - 1/8 54.25 IOM --- 16.50 KLAC + 5/8 36.50 LU +1 3/4 52.00 MMM - 3/8 83.75 COMS + 7/8 32.38Day Month Year History FOOL +0.24% 0.60% -6.64% 149.16% S&P: +0.03% -0.90% 1.29% 63.68% NASDAQ: +1.06% -0.65% -5.98% 68.54% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 16.50 555.03% 8/5/94 680 AmOnline 7.27 45.50 525.61% 8/11/95 125 Chevron 50.28 64.38 28.02% 8/12/96 110 Minn M&M 65.68 83.75 27.52% 10/1/96 42 LucentTech 47.62 52.00 9.21% 8/12/96 280 Gen'l Moto 51.97 54.25 4.38% 8/12/96 130 AT&T 39.58 33.75 -14.72% 8/24/95 130 KLA Instrm 44.71 36.50 -18.37% 8/13/96 250 3Com Corp. 46.86 32.38 -30.91% 10/22/96 600 ATC Comm. 22.94 5.63 -75.48% Rec'd # Security In At Value Change 8/5/94 680 AmOnline 4945.56 30940.00 $25994.44 5/17/95 2010 Iomega Cor 5063.13 33165.00 $28101.87 8/12/96 110 Minn M&M 7224.44 9212.50 $1988.06 8/11/95 125 Chevron 6285.61 8046.88 $1761.27 8/12/96 280 Gen'l Moto 14552.49 15190.00 $637.51 10/1/96 42 LucentTech 1999.88 2184.00 $184.12 8/12/96 130 AT&T 5145.11 4387.50 -$757.61 8/24/95 130 KLA Instrm 5812.49 4745.00 -$1067.49 8/13/96 250 3Com Corp. 11714.99 8093.75 -$3621.24 10/22/96 600 ATC Comm. 13761.50 3375.00-$10386.50 CASH $5240.09 TOTAL $124579.72