The New Nifty Fifty

Students of market history recognize the term “Nifty Fifty” — the name given to a group of “one-decision” buy-and-hold growth stocks in the early 1970s. These stocks were seen as having such reliable earnings growth that they were worth buying at any price-to-earnings ratio.

That, of course, proved to be incorrect: During the 1973-1974 bear market, the Nifty Fifty stocks plummeted and suffered returns far worse than the broader market.

This crash often is presented as the end of the Nifty Fifty story, which frequently is included in lists of “manias” that have occurred in the markets over the years. But in reality, investors might not have been that far off base in bidding up these stocks.

In 1998, famed Wharton professor and value investor Jeremy Siegel conducted a study that looked at how the 50 stocks would have performed in the subsequent 24 years if they had been purchased at their peaks in 1972. Surprisingly, the group delivered a return of 12.2% and nearly beat the 12.7% gain of the S&P 500 Index in that time — even when their 1973-74 crash was factored into the equation.

Siegel’s conclusion: “… stocks that are able to consistently maintain earnings growth year-after-year are often worth far more than the multiple that Wall Street considers ‘reasonable.’ Good growth stocks, like good wines, are often worth the price you have to pay.”

How the Lessons of the 1970s Apply Today

Forty years later, the story remains relevant because a new group of winners has emerged in the past three years: call them the New Nifty Fifty. This is a select group of largely household names with steady earnings, the ability to ride out the perpetual crises overseas and, in most cases, above-average dividends. In this case, it isn’t necessarily growth that’s in demand, but reliability. Four key elements are common among the members of the New Nifty Fifty:

  1. Performance: All of these stocks have delivered three-year results that are not just strong, but also steady. Any selloffs generally have been limited, and when downturns have occurred, the stocks have bounced back quickly.
  2. Stability: These 50 companies are known for their steady businesses, recurring revenues and lack of exposure to hard commodity prices. The vast majority of the names on this list are neither producers nor consumers of hard commodities, which helps dampen volatility by limiting exposure to broader economic trends.
  3. Domestic focus: Another element of the common ground this group shares is that they either are focused primarily on the domestic market or, in the case of the pharmaceutical companies, they have overseas exposure but are selling products that aren’t vulnerable to debt crisis in Europe or the economic slowdown in China.
  4. They look good in an annual report: Although the first three factors are all critical in the strong performance of these stocks, there’s another factor at work here that’s more subjective. At a time of elevated external risks, professional money managers don’t want to get caught having to explain to clients why they held a stock that blew up. With all of these names comes a minimal level of career risk for portfolio managers — an important attribute that doesn’t show up on a balance sheet.

The New Nifty Fifty is shown in the table below. While the original 50 contains a few names that are no longer with us — such as Polaroid and Eastman Kodak — no fewer than 10 names were on the original list 40 years ago: Phillip Morris (NYSE:MO) and (NYSE:PM), Pfizer (NYSE:PFE), Bristol-Myers Squibb (NYSE:BMY) (which was two companies at that point), Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), Eli Lilly (NYSE:LLY), McDonald’s (NYSE:MCD) and Walt Disney (NYSE:DIS).

Stock Ticker 3-Year Return Fwd P/E
Apple AAPL 299.9% 11.2
Microsoft MSFT 30.0% 9.6
AT&T T 76.2% 13.9
Coca Cola KO 66.1% 17.6
Pfizer PFE 74.7% 9.9
Phillip Morris International PM 134.9% 15.8
Verizon VZ 81.0% 16.3
Wal-Mart WMT 62.0% 13.6
PepsiCo PEP 36.1% 15.9
Abbott Labs ABT 63.2% 12.3
McDonald’s MCD 74.1% 15.0
Walt Disney DIS 130.1% 14.2
Comcast CMCSA 138.8% 14.6
Home Depot HD 127.9% 15.3
Altria Group MO 147.0% 15.2
Kraft Foods KFT 60.8% 14.4
Visa V 102.7% 17.9
US Bancorp USB 90.8% 10.9
Bristol-Myers Squibb BMY 130.4% 16.4
American Express AXP 120.0% 12.2
Colgate-Palmolive CL 53.2% 17.8
Eli Lilly LLY 53.8% 11.9
Southern Co. SO 75.1% 16.9
Costco COST 108.2% 21.5
Starbucks SBUX 279.5% 23.3
Target TGT 64.4% 12.5
Biogen Idec BIIB 215.5% 20.2
Kimberly Clark KMB 76.9% 15.5
TJX Companies TJX 164.2% 16.6
Dominion Resources DO 85.8% 15.8
American Tower AMT 125.8% 35.4
Allergan AGN 89.1% 18.8
Automatic Data Processing ADP 73.1% 18.7
McKesson MCK 113.4% 11.9
Ecolab ECL 83.9% 18.9
Equity Residential EQR 255.0% 21.6
Chubb CB 89.2% 11.9
Lorillard LO 132.6% 14.5
Heinz HNZ 64.8% 14.6
Crown Castle International CCI 135.1% 57.5
Ross Stores ROST 226.2% 18.1
Whole Foods Market WFM 334.3% 33.1
Reynolds American RAI 170.9% 14.6
Chipotle Mexican Grill CMG 363.7% 35.8
Dollar Tree DLTR 256.7% 18.5
Sherwin-Williams SHW 138.4% 16.9
Hershey HSY 104.1% 20.3
AutoZone AZO 142.2% 14.1
Brown-Forman BF.B 135.0% 22.3
Family Dollar FDO 132.9% 16.2

Although the original Nifty Fifty was classified as a mania, there is no such valuation premium put on these names today. Given the strength in the original group of global leaders in the years that followed their peak, long-term investors still might find plenty of opportunities on this list even after their strong gains in of the past three years.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.

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