Valuing Growth Stocks: Revisiting the Nifty 50

For your weekend reading, I submit the following article on growth stocks published this week by the AAII as #20 (printed in 1998) of the best 40 articles every published in the AAII Journal.  This one is entitled, "Valuing Growth Stocks: Revisiting the Nifty 50" featuring a list of 50 golden companies considered so solid and so reliable and so profitable that it was the ultimate buy-and-hold. You could buy these stock with "one decision" and literally hold them forever and know you will do very well.  These were stocks chosen in the 1960s and the author reexamines them in 1998 to see if they held up to expectations.  Hope everyone is having a great weekend. 

TOP40: Article 20

Valuing Growth Stocks: Revisiting the Nifty 50 The Nifty 50 was a group of 50 stocks that were most favored by institutional investors in the 1960s and 1970s. Companies in this group were usually characterized by consistent earnings growth and high price-earnings (P/E) ratios. The Nifty 50 stocks got their notoriety in the bull markets of the 1960s and early 1970s. They became known as “one-decision” stocks because investors were told they could buy and hold forever. Examples of Nifty 50 stocks included General Electric Co., Coca-Cola Co., IBM Corp., Xerox Corp. and Polaroid Corp. However, many of these stocks fell back to earth during the 1973–1974 bear market. In his October 1998 article, Valuing Growth Stocks: Revisiting the Nifty 50, Jeremy Siegel revisited the Nifty 50 to see whether they were examples of irrational exuberance or if investors were right to predict that the companies’ growth would eventually justify multiples of 50, 80 or even 100 times earnings. What I found most remarkable when reading this article is how many of the Nifty 50 stocks still operated as stand-alone firms as of mid-1998. Siegel noted 14 corporate changes to his listing between the 1973–1974 bear market and when he wrote the article. Siegel concluded that, although the Nifty 50 were overvalued as of 1972, they weren’t grossly overinflated. He also calculated a “warranted P/E” in 1998 based on their performance after the 1970s bear market and found that many of these stocks were worth even more than their valuations of the 1970s. One group from the Nifty 50 that did not fare well in the aftermath of the 1973–1974 recession was technology firms, including IBM, Xerox, Digital Equipment Corp. and Texas Instruments. Of this group, Texas Instruments saw the best annualized return between December 1972 and August 1998 at 9.1%, compared to 12.7% for the S&P 500 index. The ultimate conclusion Siegel presents is that a portfolio of Nifty 50 stocks purchased at the peak of 1972, would have nearly matched the S&P 500 over the next 26 years. He argues that the market’s misconception of these stocks led to subsequent undervaluation of many large-cap growth stocks throughout the 1980s and early 1990s. To learn more about the Nifty 50 and Siegel’s research, be sure to read his article Valuing Growth Stocks: Revisiting the Nifty 50. Stay tuned: My next email highlights an AAII Journal article on the fundamentals of technical analysis by the legendary Al Frank.           Read the full article now —     Valuing Growth Stocks: Revisiting the Nifty 50