In the early 1970s a widely publicized list of the Nifty Fifty stocks was drawn up. This
Question:
In the early 1970s a widely publicized list of the "Nifty Fifty" stocks was drawn up. This list, which included Avon Products, Polaroid, Coca-Cola, McDonald's, Walt Disney, Amer- ican Express, and Xerox, was touted as a set of "good buys." Most of the firms traded at high multiples. Their P/E ratios were as high as 70 to 90, with an average of 42, while the S&P 500 traded at a multiple of 19 times earnings. Burton Crane, a New York Times reporter, wrote the famous words at the time: "Xerox's multiple not only discounts the future but the hereafter as well." Unfortunately, many of those Nifty Fifty stocks lost considerable value in the subse- quent 1970s bear market. Avon's stock fell 80 percent, as did Polaroid's. Coca-Cola, IBM, and Xerox fell dramatically. The multiples of the Nifty Fifty in 1972 bear a strong resemblance to those of the "nifty" technology stocks of the late 1990s, and indeed to those of mature "quality" firms such as Coca-Cola, General Electric, Pfizer, Merck, and Walt Disney (all of which were in the orig- inal Nifty Fifty of 1972). Morgan Stanley published a new set of Nifty Fifty stocks in 1995 that included these stocks. Here are some of the firms with high earnings multiples in September 1999, with their per-share prices at that date: Price per Share (5) P/E Microsoft (MSFT) 54 90 Dell Computer (DELL) 70 44 Lucent Technologies (LU) 75 64 America Online (ACC) 168 104 Analog Devices (ADI) 65 56 Mattel (MAT) 72 21 CBS Corp. (CBS) 72 46 Cisco Systems (CSCO) 110 68 Home Depot (HD) 51 69 Motorola (MOT) 95 87 Charles Schwab (SCH) 56 34 Time Warner (TWX) 185 61 Track the return to these stocks from October 1999. You might use a price chart that tracks stock splits (for example, Big Charts at http://www.bigcharts.com) How have these nifty stocks fared? Here are some less nifty stocks at the time, all of which were in the S&P 500. They have low P/E ratios. P/E Price per Share (5) Centex (CTX) 7 28 ITT Industries (ITT) 2 32 Seagate Technology (SEG) 7 30 U.S. Airways (U) 3 26 Conseco (CNC) 6 20 Hilton Hotels (HTL 8 10 How have these stocks fared? (Note: This case was written in October 1999, without any idea of the outcome.)
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Financial Statement Analysis And Security Valuation
ISBN: 9780071267809
4th International Edition
Authors: Penman-Stephen-H, Steven Penman