The Nifty-Fifty High Price to Earnings Ratio and Subsequent Crash
The original Nifty-Fifty was a list of stocks during the 60s and 70s which had solid earnings growth and high price to earnings ratio in which the prices of those growth stocks rose to unreasonable heights in the early 1970s, as evidenced by their subsequent crash.
The majority of the Nifty-Fifty on the list had price to earnings ratio of 50 or more which is why they were also named “50” — these stocks lost their luster during the bear market of 1973-1974, where these stocks were crushed in a matter of months.
Many large institutions recommended these Nifty-Fifty stocks to their clients as life long buy and holds — those fifty stocks where all large caps on the New York Stock Exchange. The 1973-1974 Bear Market, which brought a sharp decline on these companies changed the views of institutions on these stocks overnight, and the “Nifty 50” was all but forgotten. It wasn’t until after the 1987 crash through the late 1990s did investors once again buy these stocks for longer term investments and not for quick swing gains.
The Nifty-Fifty story is that investors became too fascinated with growth stocks in the early 1970s and pushed the prices of their favorites to unjustified heights. At the time, the long-run performance of these investor favorites justified their seemingly high prices and there is a substantial and statistically persuasive inverse relationship between P/E ratio and subsequent long-term performance.
People often recall the early 1970s when institutional investors were infatuated by the Nifty Fifty — a small group of “One-Decision Stocks” — companies so appealing that their stocks should always be bought and never sold, regardless of price. Among these select few were Avon, Disney, McDonald’s, Polaroid, and Xerox. Each was a leader in its field with a strong balance sheet, high profit rates, and double-digit growth rates.
The “Nifty Fifty” stocks rose to very high levels in the 1960s, but was followed by very flat stock market prices for two decades. At some price, a great company’s stock is expensive and at some price, a lousy company’s stock is cheap.
The original Nifty 50 list of stocks …
American Home Products
Black & Decker
American Hospital Supply Corp.
The Coca-Cola Company
Digital Equipment Corporation
Eli Lilly and Company
Emery Air Freight
First National City Bank
Heublein Brewing Company
International Flavors and Fragrances
International Telephone and Telegraph
Johnson & Johnson
Louisiana Land and Exploration
Minnesota Mining and Manufacturing (3M)
Merck & Co.
MGIC Investment Corporation
Philip Morris Cos.
Procter & Gamble
Joe Schlitz Brewing
Sears, Roebuck and Company
The Walt Disney Company
Tags: 1960s, 1970s, 1973-1974 Bear Market, 50, American Express, American Home Products, American Hospital Supply, AMP, Anheuser-Busch, Avon, Baxter, Bear Market, Black & Decker, Bristol-Myers, Burroughs, Chesebrough-Ponds, Coca-Cola, Digital Equipment Corporation, Double-Digit Growth, Dow Chemical, Earnings Growth, Eastman Kodak, Eli Lilly, Emery Air Freight, First National City Bank, General Electric, Gillette, Halliburton, Heublein Brewing Company, IBM, International Flavors and Fragrances, International Telephone and Telegraph, JC Penney, Joe Schlitz Brewing, Johnson & Johnson, Large Institutions, Long-Term Performance, Louisiana Land and Exploration, Lubrizol, McDonalds, Merck, MGIC Investment Corporation, Minnesota Mining and Manufacturing, Nifty 50, Nifty-Fifty, One-Decision Stocks, PE Ratio, Pepsi, Pfizer, Philip Morris, Polaroid, Price to Earnings Ratio, Procter & Gamble, Revlon, Schering Plough, Schlumberger, Sears, Simplicity Patterns, Squibb, SS Kresge, Stocks, Texas Instruments, Upjohn, Walt Disney, Xerox