PS-- Article of interest>>>>>>>>>>'Nifty Fifty' stocks give valuable lesson
NEW YORK - Jeremy Siegel, author of the influential 1994 book Stocks for the Long Run and
professor at the Wharton School of the University of Pennsylvania, says he worries that people will
think his work justifies buying stocks at any price. He may not worry enough.
Siegel is your man if you're fretting about buying Coca-Cola at 43 times expected 1997 earnings.
He's your man if you're worried about paying historically high price-earnings ratios (P-Es) for other
giant companies, now popularly perceived as multinational growth companies. And since those
issues weigh heavily in Standard & Poor's 500 index, Siegel can make you feel better about buying
an index fund with the market at record valuations.
Two years ago Siegel followed his book with a paper published in the Journal of Portfolio
Management. He argued that the long-maligned buyers of "Nifty-Fifty" stocks in the early '70s
had been proven right. The companies were so golden that they would always be good
investments. The prices investors paid, 42 times earnings for the group at the market peak in
December 1972, have been justified over time as fair, he concluded. The Nifty Fifty included
Philip Morris, Disney, Merck and, yes, Coca-Cola.
The study "means the old maxim of don't pay more than 20 or 25 times earnings of an established
growth company doesn't necessarily have any validity," Siegel says. "Many growth companies are
worth many more times than that."
Challenging market legends
He delights in debunking an argument made in 1940 by Benjamin Graham, father of modern
security analysis and learned master for Warren Buffett. In his article, Siegel put up and then
knocked this line from Graham and colleague David Dodd: "People who habitually purchase
common stocks at more than about 20 times their average earnings are likely to lose money in the
long run."
Siegel found that if you had invested in the Nifty Fifty at their 1972 peak and held the issues
through May 1995, your annualized return would have been 10.97%, just shy of the 11.23% of
the entire market. Siegel says he's updated the performance through December 1996 and the
results are essentially the same: Nifty Fifty investors hadn't been the buy-high fools they appeared
to be for two decades.
Still holds true
Siegel says his findings are relevant even though the Dow Jones industrials are up 75% since May
1995, when he prepared the paper, and even though Coca-Cola's P-E on trailing earnings has
gone from 27 to 47. "We haven't reached the peak of the market and we haven't reached the peak
of growth stocks," says Siegel.
Siegel draws support from the stock performance of Coca-Cola. In December 1972, it traded at
a P-E of 46, but was really worth 87 times earnings, he says. Assuming you paid 87 times earnings
then and held Coke until this past December, you would have gotten the same return, dividends
included, as from the market as a whole.
The problem is that if you buy high P-E stocks now, you should probably cross your fingers for
good luck. If this proves to be a peak in the market, you may have to wait 10, 15 or 20 years for
the next peak to justify the price you paid. The long run may be painful even if you get to declare
its end on a date that redeems your sin.
Siegel concedes that the market's climb has corrected all of the undervaluation that afflicted the
market in the '70s and early '80s. "We're moving into territory above the normal valuation levels,"
he says. But Siegel says it is not time to sell high P-E growth stocks.
Lulled by success?
Perhaps he's been so blessed by the bull market's endorsement of his book and paper that he's
blind to its excess. Siegel says he has enjoyed a fair amount of fame lately. His book has sold
80,000 copies, stunning for an academic text given no popular marketing. "Obviously, we can't
deny the reinforcement of events, and events have certainly been very, very kind to the theory," he
says.
But "stocks are not buys at any price," he says. "There can be prices where they are too high and
will give you worse performance than alternative financial instruments." |
