Jim Collins' bestselling business book Good to Great discussed what it took for companies to take the extra step toward greatness. Yet as a recent Arkansas Business article pointed out, even those great stocks haven't done too well.
A basket of the great stocks from that volume would have tracked the S&P 500 index fairly closely over the past year of economic tumult with a 43% loss. That unimpressive result casts doubts on exactly how useful Collins' criteria for greatness really are.
The S&P actually outperformed the true-blue greats (unless you let Procter & Gamble (NYSE:PG) switch-hit for Gillette, which P&G acquired in 2005). The best performer of the bunch is pharmaceutical giant Abbott Labs (NYSE:ABT) with a minuscule 2.5% price drop, or a small gain if you reinvested its dividends. The worst? Circuit City, going out of business in ignominious defeat at the hands of Best Buy (NYSE:BBY) -- which might, in turn, be one of the present-day Great Ones.
You call that great? Hah!
But mirroring the S&P might not be so bad, all things considered. You would have done much worse investing in what remains of Collins' "direct comparison" businesses -- chosen because they had the same opportunities and similar resources as the great ones, at the same time, and yet failed to make the leap to sustained greatness. Here are a few of them and what they've experienced recently.
|
"Comparison" Company |
"Great" Rival |
Result |
|---|---|---|
|
Bank of America (NYSE:BAC) |
Wells Fargo |
90% share-price implosion in the past year; Wells Fargo suffered a smaller 64% drop. It's hard to call either one a winner lately. |
|
Great Atlantic & Pacific Tea |
Kroger |
82% one-year price drop; Kroger lost 13%. |
|
R.J. Reynolds |
Altria (NYSE:MO) |
39% swoon since last year vs. Altria's 28% drop. The Marlboro cowboy hogties Joe Camel. |
|
Bethlehem Steel |
Nucor (NYSE:NUE) |
Bought out in 2003, now belongs to Arcelor Mittal. |
By my count, nine of the 11 "greats" are still freestanding businesses, versus just three of the comparison picks. When I ran the basket of the lesser rival survivors and the companies that devoured the weakest ones through my total return calculator, I got an average loss of 58%, or 52% taking dividends into account. So while a 40% price drop may not sound like greatness in the short run, you still have to give those stocks the edge when it comes to staying power.
Now we're talking!
The defined "greatness" periods of these businesses happened decades ago, with Philip Morris' market-stomping era ending in 1979. The qualities that made them great so long ago seem to have created some lasting improvements that the competition just couldn't match. The S&P 500 ain't that stable itself, you know – more than half of its 500 stocks have turned over since the beginning of 2000. Gillette is still a well-respected part of a very successful Procter & Gamble, and Circuit City folded only a couple of months ago.
In other words, if you truly believe in the Foolish credo of long-term buy and hold, you could do far worse than looking for Collins' criteria:
- Honest, disciplined management.
- A clearly defined business plan ...
- ... with a big moat ...
- ... and a willingness to change with the times as necessary.
In short, I'm not ready to toss my copy of Good to Great on the campfire, in search of the next big management theory. Collins' favorite management qualities may indeed wear off a few decades after they're installed, but that's still plenty of time to ride a great stock to market-squashing returns. Buy at the bottom of the current downturn (whenever that might be, but today might be close enough), and you'll retire filthy rich.
