10 Stocks to Last the Decade, Revisited

Back in the summer of 2000, Fortune -- a highly respected publication, home to many fine pieces of journalism over the years -- published an article titled "10 Stocks to Last the Decade."

An easy enough challenge, one might surmise -- simply picking 10 companies that would, umm ... not disappear. Actually, the article promised more than that. These stocks were specifically predicted to be winners, according to the piece's introduction:

"Given the market's recent volatility, a few of our picks could experience drops over the coming months and years. But if you're a long-term investor, these 10 should put your retirement account in good stead and protect you from those recurring nightmares about the stocks that got away."

Here's the list, and how they've done since:

Not so good. Not sure that I'd mind that these opportunities got away.

All right, I'm not here to dance upon the grave of one prediction gone bad. Everybody in this business has had more than a few, and there's no benefit gained in mocking anyone. But let's consider the lessons learned here, and how you can avoid making the same investing mistakes with them -- because the lists of "hot stocks to buy now," or "The Next Decade's Best Stocks" are being prepped for the covers of magazines even now.

1. All of these companies might be considered "of the moment."
The article explicitly adopted and endorsed the term "new era" multiple times. We've got a biotech, the exciting wireless and telecommunications companies, software, and online brokers among the choices. Each of these industries seemed to be fairly revolutionary at the time. But revolutionary enterprises don't necessarily make very good investments, particularly if too many other people are thinking the same way at the same time. And "too many" is exactly how many there usually are, especially several years into nonstop coverage of the revolution and the monstrous stock returns that those companies have previously achieved.

2. Explosive growth was very clear -- in the rearview mirror.
Leading up to the summer of 2000, these companies collectively had very strong revenue growth over the previous several years. Now, not all of this revenue growth was leading to big earnings, but those earnings were expected to materialize sooner or later. Investing on the hope that earnings will someday appear -- though it sometimes works out -- is not nearly as effective an investing strategy in general as investing in companies with solid histories of earnings and free cash flows.

Also, these companies' prices were discounting future revenue and earnings growth for upcoming years that equaled what they had enjoyed in the previous years. Which brings us to the third point ...

3. Apparently, attractive valuation was not a consideration for this list.
As a group, these companies practically defined stocks priced for extraordinarily high future growth, ignoring present-day earnings. With the exception of Genentech, that growth did not materialize as expected.

Of course, those companies weren't the only ones underwhelming investors over the next seven years. Valuations for all types of companies were out of control. Today, with the price/earnings multiple of the market at its lowest point in the past 12 years, there are a lot more attractive stock choices out there -- even in the category of companies that are New Era.

At Motley Fool Stock Advisor, we hunt for companies that are good decade-long investments. While not oblivious to the opportunities that new technologies sometimes present, valuation is always a major consideration, as is a conservative estimate of future growth opportunities. We and our readers are up 65% on money added to the market over the past five years, compared to 27% in the S&P 500. It's been fun so far, and if you want to join the ride, you're welcome to a free 30-day guest pass at any time.

This article was first published Feb. 2, 2007. It has been updated.

Bill Barker does not own shares of any company mentioned. Schwab is a Stock Advisor recommendation. The Motley Fool has a disclosure policy.