Nifty Fifty Stocks: Historical Performance Since 1971

In 1971, The Morgan Guaranty Trust created a list of 50 stocks dubbed the “Nifty Fifty” that could be purchased and then held for the rest of one’s lifetime. The valuation at the time of the list’s creation was unfortunate–it was analogous to making such a list in 1998 or 1999 at the height of dotcom mania. Many of the P/E ratios were extreme for large companies.

Burroughs and Simplicity had such a near collapse of shareholder wealth that it effectively wiped out shareholders even if it didn’t include a formal bankruptcy. Polaroid, and Kresge which became K-Mart, did go bankrupt. The shareholders of Emery and Eastman-Kodak were each tossed a lifeline, as Emery had part of its assets become UPS stock and Eastman-Kodak spun-off Eastman Chemical that is still solvent and growing to this day. Schlitz Brewing shareholders got bought out by the Stroh family in 1982, which was a blessing because they eventually ran into huge debt problems and had to take a substantial loss when selling the remaining assets to Pabst in 1999. I am unsure what happened to MGIC. It may have either compounded for 21% between 1971 and 1981 if it received a cash-out offer from Baldwin-United, but if it became Baldwin-United stock, it would have gone bankrupt and resulted in a 100% loss.

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Beer Dividends From Diageo

In 2007, Diageo debuted its publicly traded ADR with the ticker symbol DEO for investors in the United States. An ADR means a sponsoring bank–in the case of Diageo, it is the Bank of New York Mellon–goes over on the London Stock Exchange and purchases a giant block of Diageo stock that is then packaged and sold to American investors. An ADR means the shares are created through a bank buying the shares on a foreign exchange and then supervising the trading; an ADS means that the corporation itself acts as an issuer of shares on a trading exchange outside of the country where the business is domiciled.

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Never, Ever Make A Long-Term Investment In Alcoa

I had gotten some e-mails from readers asking about Alcoa’s proposed spinoff of Arconic later this year, and I don’t currently have any comment on the quality of Arconia as an investment because I don’t know enough specifics about the operations that are about to be spunoff. But I do know enough about Alcoa’s core aluminum business to say this: Never make a long-term investment in the aluminum sector. Especially an operator that has a lot of debt and steep losses during extended declines in the sector which are never offset by the short-lived and dispersed years of high aluminum prices.

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12% Annual Returns Through 2021

Diageo (DEO) is fast becoming my best idea for risk-adjusted returns over the medium term. Among non-cyclical business sectors, it seems that almost everywhere you look, you either have to pay towards the high end of fair value for a stock, overpay a little bit, or take on a corporation that is trading at a favorable valuation because it is working through some problems. There is absolutely a place in a portfolio for that third category, but there is also a place in a portfolio for those corporations that roll along nicely, growing earnings, selling products that drown the shareholders in cash, and create dividend streams that are almost certain to rise over every rolling five year period.

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So When Would You Sell Johnson & Johnson Stock?

Now, for the flip side of the argument. Just as it is a mistake to sell a corporation like Nike or Johnson & Johnson when the market quotation of the stock looks like it might have gotten a little overheated, there does exist a price at which holding onto a stock becomes foolish because the future returns will be so impaired by P/E compression that even a great company would lose its ability to create meaningful wealth from that price point.

The late 1990s provided a good illustration of when those mega-cap firms can get a little too pricey. Coca-Cola traded in the vicinity of 70x earnings. Since the summer of 1998, Coca-Cola has only returned 3.44% annually. That’s actually an extraordinary result under the circumstances, considering that Coca-Cola has spent the past eighteen years growing earnings to offset the brutal P/E compression from 70x earnings to the neighborhood of 20x earnings. The fact that such an investor has something positive to show for it is actually a vindication rather than repudiation of owning excellent company as positive returns eventually resulted from epically bad valuation decisionmaking.

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