It would be like looking at how many passing yards a quarterback has through 10 weeks and deciding if you want to bet on that team to make the playoffs. The price-to-earnings ratio doesn’t tell you how fast the business is growing, what their capital structure looks like, or how much cash they have. But looking at a P/E ratio often misses the bigger picture. There have been plenty of comparisons over the years between this market and the one from the early 70s, and the main reason cited is the fact that these names are over loved, over owned, and are trading at an above average price-to-earnings multiple. An investor who bought these 24 stocks at the end of 1972 would have had 50 percent less wealth at the end of 2001 than an investor who bought the S&P 500. Here, 80 percent of the Kidder Peabody stocks underperformed the market, but one (yes, one with a P/E above 50) hit the jackpot…The Terrific 24 stocks that were on both lists did substantially worse than the S&P 500. Perhaps, buying a high P/E stock is like buying a lottery ticket: the expected return is not good, but there is a chance of a huge payoff. Wal-Mart’s 26.96% annualized return over this 29-year period was the third highest in the entire CRSP data base. Only ten stocks on the Kidder Peabody list beat the S&P 500, but one did so spectacularly. Many of these high-fliers would underperform the market for the next 3 decades. This table comes from a 2001 paper, The Nifty-Fifty Re-Revisited, where the authors looked at how this group did over the next several decades compared to the S&P 500. The first column shows their P/E ratios in 1972, and their annualized return for the next few decades in the second column. There were 24 stocks that appeared on both lists, which you can see in the table below. There was a list from Morgan Guaranty Trust (that was found in the footnote of a 1977 Forbes article) and a list from Kidder Peabody that showed the 50 Big Board stocks with the highest P/E ratios. So who were the Nifty Fifty? Turns out there never was an official stamp on this group. This group became colloquially known as “The Nifty Fifty”. These were blue-chips that had such high growth prospects that no price was too high to pay. People saw how quickly smaller companies could lose their value, so they turned to a new group of “one decision” stocks. In just 17 months, they lost 56% of their value, leaving investors once bitten, twice shy. The bear market of 1969 absolutely wrecked small stocks.
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