Colgate-Palmolive: The Tenbagger Peter Lynch Did Not Predict

In 1989, Peter Lynch referred to Colgate-Palmolive as a stalwart stock, and quipped: “How much can you expect to squeeze out of Colgate-Palmolive? You aren’t going to become a millionaire off it. . .unless there is some startling new development you would have heard about by now. With the stalwarts you have to consider taking profits more readily.”

Incidentally, the beginning of January 2014 marked the moment when a $20,000 investment in Colgate-Palmolive would have become worth over $1,000,000 had it been purchased at the moment when Lynch said that in the summer of 1989.

With blue-chip stocks, there is this constant underestimation that the glory days are over because there is simply nowhere else to go. This kind of logic ignores the potential for acquisitions, technology gains/productivity gains, price increases at rates greater than inflation, and enduring buyback programs with the excess free cash flow.

With the Coca-Colas, Johnson & Johnsons, and Colgate-Palmolives of the world, Peter Lynch recommends selling after a 30% to 50% gain. It’s hard to argue with a guy that compounded wealth at a rate of 29% annually from 1977 to 1990, so I’ll just say this: holding on indefinitely does not carry with it the adverse consequences that some imagine.

The key determination for me is to look at the underlying strength of the “profit engine” inside of the corporation. With Colgate-Palmolive and Coca-Cola, the engine for growth is set up to be 8-12% annually for the long term. That is why I write about them all the time. With other excellent companies like Campbell Soup and American States Water, the current economic engine inside the company only brings about 4-7% annual growth. That’s why I do not discuss them with the same frequency; the quality is there, but the growth is not.

Peter Lynch was famous for talking about his “tenbagger” stocks, meaning investments that increased tenfold from $10,000 to $100,000 or whatever the amount may be. Trying to do that over a five to ten year period of time is hard and requires balance-sheet reading skill that would have to put you in the top 0.01% of investors out there.

It’s crazy to think that Colgate-Palmolive—dish soap and toothpaste!—has been a fifty-bagger over the past twenty-five years. And that you required that you only do three things: (1) come up with some money to invest, (2) be patient, (3) and stay alive. All it takes is the ability to expand the time zone over which you need your money. If you frantically need to double or triple your money over a five to ten year stretch, then you have to increase your risk by buying things that have a lower probability of success. But if you are willing to wait fifteen to twenty-five years, then you can get your probabilities in the 80-90% range and stick with the McCormicks, ExxonMobils, Colgate-Palmolives, and Brown-Formans of the world.

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4 thoughts on “Colgate-Palmolive: The Tenbagger Peter Lynch Did Not Predict

  1. scchan_2009 says:

    I am sure Warren missed a few picks too. Don't think even him give a glance at toothpaste. The key is that if you find a sound and easy to understand business, time is your friend unless you ridiculously overpay at the beginning.
    The right model is 1) Find the right business 2) and then find a reasonable price.

  2. Elle_Navorski says:

    From the article: "With the Coca-Colas, Johnson & Johnsons, and Colgate-Palmolives of
    the world, Peter Lynch recommends selling after a 30% to 50% gain." This sentence raised an eyebrow. As Tim notes, the point comes from Lynch's 1989 book, One Up On Wall Street. But I think Lynch qualifies the point quite a bit more in his book, acknowledging what Tim says subsequently above. For example, on selling stocks Lynch also stated:

    — "There's no arbitrary limit to how high a stock
    can go, and if the story is still good, the earnings continue to
    improve, and the fundamentals haven't changed, 'can't go much higher' is
    a terrible reason to snub a stock. Shame on all those experts who
    advise clients to sell automatically after they double their money.
    You'll never get a ten-bagger doing that." — from Lynch's book

    — "Well, I think the secret is if you have a lot of stocks, some will do
    mediocre, some will do okay, and if one or two of ’em go up big-time,
    you produce a fabulous result. And I think that's the promise to some
    people. Some stocks go up 20–30 percent and they get rid of it and they
    hold on to the dogs. And it's sort of like watering the weeds and
    cutting out the flowers. You want to let the winners run. When the fun
    ones get better, add to ’em, and that one winner, you basically see a
    few stocks in your lifetime, that's all you need." — from Lynch's 1997 interview with PBS

    It's a bit of a nit on my part. But it bothered me that Lynch seems to recommend selling blue chips after a run-up. In my opinion based in further reading, he does. And he doesn't.

  3. says:

    Elle_Navorski No biggie, Elle. I think a lot of it has to do with different intended audiences and what is on your mind at a given point. When you talk finance with a bunch of people on the street, you are going to talk differently than if you are speaking at an investing conference for high school teachers, and you are going to talk differently at a catered lunch with billion-dollar investors. Sometimes what you advocate isn't entirely personal preference, but can be in light of the audience as well. 

    With people like Lynch, Graham, Buffett, Munger, Yacktman, and Neff, they have spoken to so many different audiences with different skill sets that what might appear to be inconsistencies are really just adjustments to the audience.

    And plus, abstract philosophy and general investing principles are different depending on the specific companies involved. Holding JC Penney, Sears, and Best Buy until you die is very different from holding Coca-Cola, Johnson & Johnson, and Procter & Gamble until you die. Three of the companies have sustainable profit engines, and three do not.  

    My guess is that they would all nod with approval if someone came up to them and said "I've been holding Dominion Resources for 50 years and living off the dividends." I would guess they'd also nod with approval at someone who sold some of their stock holdings in the late 1990s, saying "I couldn't understand the valuation of megacap companies trading at 40x earnings with record profits, so I got out."

  4. jackfleming06 says:

    I think that’s a very
    valid point of buying the stock on dips. Because we have been seeing the
    emerging markets struggling to increase their growth. Inflation has been rising
    and purchasing power of people there has decreased. If this situation further
    worsens, risks can be there. And the Fed tapering also would negatively impact
    the Emerging economies. But apart from this harsh reality, CL is showing strong
    Organic growth which can be an important factor in increasing their share price
    in the future.

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