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What true growth investors can learn from the success and failure of the “Nifty-Fifty”

by , 15 August 2016
What true growth investors can learn from the success and failure of the “Nifty-Fifty”
In the early 1970s, companies like Coca-Cola, IBM, Johnson & Johnson, Pepsi and 46 others soared on the stock market. These companies were dubbed the “Nifty-Fifty”.

In simple terms, the “Nifty-Fifty” were a group of premier growth stocks that became market darlings in the early 1970s. All of these stocks had proven growth records, continual increases in dividends and high market caps.

And because these companies demonstrated huge potential, the Nifty Fifty were also ‘called one-decision stocks' - Buy and never sell them.

When the 1973/1974 US stock market depression hit, it slashed the value of most of the “Nifty Fifty.” Consequently, many investors vowed never again to pay for expensive growth stocks.

But over the next 25 years, many of the “Nifty-Fifty” managed to outperform the S&P 500, while some failed to even make a return.

My point is, there are two important lessons growth investors can learn from the success and failure of the “Nifty-Fifty.”
 
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Lesson #1:  You must pay the price for consistent performing growth stocks
 
Growth stocks often exhibit very high PE ratios, but stocks that are able to consistently maintain earnings growth year-after-year are often worth far more than the PE that mainstream media considers “reasonable.”
 
For example: Coca-Cola was trading on a PE of 46.4 (more than double the S&P 500), yet it returned 16.2% a year for 26 years, beating the S&P’s 12.7%. What’s more, from 1972 to 1998, Coca Cola achieved a 13.5% average yearly earnings growth rate compared to the S&P’s 8%.
 
Just think about this, when Buffett bought Coca Cola, he paid a massive 30% premium for its earnings and a 50% premium for its cash flow compared to its sector's average.
 
But Buffett simply didn't care. In fact, his investment in coke grew nearly 16 times over.
 
Lesson #2: Not all growth stocks will perform the same
 
The “Nifty-Fifty” comprised of pharmaceutical, technology, consumer and retail companies amongst others.
 
Even though they soared in the beginning of the 1970s – only a quarter managed to outperform the S&P over the following 26 years.
 
 
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Why?
 
Technology growth companies like Polaroid, Emery Air Freight and Burroughs had to always keep up with the improving technology and constantly develop innovative products. Failure to do so saw these tech stocks produce negative earnings and achieving negative returns.
 
It was the ‘boring’ consumer companies that were the winners. The reason? These companies consistently demonstrated strong brand value. For example: Companies like Coca-Cola, Pepsi, Gillette and Phillip Morris always had many customers buying their products.
 
So what you can learn from this is good growth companies demonstrate more than just consistent earnings growth.  They also need to have a strong brand value.
 
Here’s a South African company that would fit perfectly in the “Nifty-Fifty”
 
As I mentioned earlier, the “Nifty-Fifty” had proven growth records and consistent increases in dividends.
 
Some managed to outperform the market, some didn’t. But just imagine you were able to identify a magnificent growth company like Johnson & Johnson, Coca-Cola or Philip Morris. You could’ve made a fortune.
 
And what if I told you, there’s a JSE company that could’ve easily fitted in the Nifty-Fifty?
 
Take Famous Brands for example.
 
The company has achieved a 661% increase in earnings growth since 2005 and a 400% increase in dividends since 2008.
 
 
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But this isn’t the most impressive part about Famous Brands.
From a market cap of just R41 million in 1994, Famous Brands has expanded remarkably and now has a market cap in excess of R11 billion.
 
The group sealed its place as Africa’s leading branded food services franchisor with 19 restaurant brands in its portfolio, a network of 2,500 restaurants in 15 countries – including international exposure in the UK, India, Egypt and the United Arab Emirates – proving it’s a dominant business in its industry with a strong brand value.
 
And to top it off, if you invested R10,000 in Famous Brands in 1994, your money would be worth R848,400 today.
 
This just proves if you can identify growth stocks that have consistent earnings, dividends, and demonstrate a strong brand value with a profitable strategy, you can become extremely wealthy.
 
Knowledge brings you wealth,
 

Joshua Benton
Editor, Real Wealth
 
P.S. If you’re looking for growth stocks that have consistent earnings, dividends, and demonstrate a strong brand value with a profitable strategy then I urge you to check out Real Wealth. Through many hours of researching, I’ve uncovered a few magnificent growth companies that are poised to generate good returns. In fact, the last solid growth company I recommended has soared 15% in the past 2 months.


What true growth investors can learn from the success and failure of the “Nifty-Fifty”
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