Believe it or not, these “boring” names soared in the early 1970s, reaching a dot-com style peak in 1972.

In 1972, Coke sold for 46 times earnings. And Disney was even more expensive, at 71 times earnings. Then, both stocks lost three-quarters of their value in two years. And these are just two examples. Similar losses occurred throughout the Nifty Fifty.

Looking back on the situation, Forbes magazine said:

The delusion was that these companies were so good, it didn’t matter what you paid for them; their inexorable growth would bail you out.

Obviously the problem was not with the companies but with the temporary insanity of money managers – proving again that stupidity well-packaged can sound like wisdom. It was so easy to forget that no sizable company could possibly be worth over 50 times normal earnings.

But investors soon forgot what Forbes said about earnings, and history repeated in 1999. Coke and Disney soared to over 40 times earnings. Once again, people thought these companies were so good it didn’t matter what you paid for them. But once again, they were wrong…

Today – nine years later – the share prices of Coke and Disney are down. But business at both has grown dramatically… meaning it just might be time to pile money into the Nifty Fifty stocks again…

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Even though its stock price is lower, Disney earns 3.5 times as much as it did in 1999. And Coke’s earnings have doubled.

So with earnings soaring, and the stock prices stagnant, these old Nifty Fifty shares are now cheap again – Disney sells for a price to earnings (P/E) of 13.6 times forward earnings and Coke for 17.

It’s not just Coke and Disney… Earnings for the New Nifty Fifty Index (NFT on www.bigcharts.com) as a group have increased by over 100% since 1999… But the index is down since 1999. As a result, valuations have been cut in half… They’re cheap!

To explain just how cheap, Bloomberg lists the forward P/E ratio of the overall stock market at 16.25 (that’s the S&P 500). But the forward P/E of the New Nifty Fifty Index is only 12.79.

It’s hard to believe the Nifty Fifty won’t return to a premium to the overall market for one simple, brutal reason: Most companies won’t be around in 25 years. But I’d sure bet that in 25 years, families will still take their kids to Disney. And folks will still drink Coke.

I sincerely believe that, after nine years of terrible performance, the New Nifty Fifty stocks will beat the overall market over the next few years, as they simply work their way back to a premium to the overall stock market.

However, I can’t fully endorse buying up all these household names just yet. As you can see from this chart of NFT, the uptrend just isn’t there yet.

I have been burned fighting the trend in the last year. I won’t buck it.

So, do I believe it’s time for the New Nifty Fifty to soar again? Yes. We should be just about there… But wait to see the uptrend before jumping in.

Good investing,

Steve
Source: Time for the Famous Nifty Fifty to Soar Again?

• The U.S. Congress is considering a return to steel pennies and nickels that hasn’t been seen since World War II, according to the Associated Press. The cost of making a penny has risen to 1.26 cents and the cost of making a nickel has risen 7.7 cents, as soaring costs for copper, zinc, and nickel have soared in the past year.

• The European Union said yesterday (Wednesday) that Slovakia has met its criteria for adopting the euro. It will be the sixteenth country to join the group, effective January. “However, to ensure that the adoption of the euro is a success, Slovakia must pursue its efforts to maintain a low-inflation environment, be more ambitious with regard to budgetary consolidation and strengthen its competitiveness position,” Joaquín Almunia, EU commissioner for economic and monetary affairs, said in a statement.

• U.S. home sales dropped to a new low in March, signaling the housing slump has yet to bottom, the National Association of Realtors reported. The group’s seasonally adjusted index of pending sales for existing homes fell to 83.0 from a reading of 83.8 in February. The index stood at 103.9 in March 2007.

• “Grand Theft Auto 4,” Take-Two Interactive Software Inc.’s marquee video game, reeled in more than $500 million in global sales (or about 6 million units) in its first week on the shelves, Reuters reported. Take-Two was hoping strong GTA sales would bolster its position in talks with Electronic Arts Inc. (ERTS), which is offering a $2 billion, or $25.74 share, buyout.

• City officials of Vallejo, Calif. voted to file for bankruptcy, as declining housing-related tax revenue has left the San Francisco suburb unable to pay for basic services. Starting July 1, the city will have a $16 million deficit forecast for the year. “Nobody wants bankruptcy, but there doesn’t appear to be a whole lot of options left,” City Councilwoman Joanne Schivley told Bloomberg. “We are going to be out of money by June 30. It’s all a numbers game now.”

• The Walt Disney Co. (DIS) announced net income for the Burbank, Calif.-based company’s second fiscal quarter increased 22% to $1.13 billion, or 58 cents per share, Bloomberg News reported. Shares got a nice 3% boost, gaining 97 cents to close at $34.70 yesterday (Wednesday).

• Tech giant Cisco Systems Inc. (CSCO) announced it earned $1.77 billion, or 29 cents per share for its fiscal third quarter, down from $1.87 billion, or 30 cents, for the same period in the prior year, MarketWatch reported. Cisco shares slumped 2%, losing 55 cents to close at $25.78 yesterday (Wednesday).

• The U.S. Securities and Exchange Commission will require greater disclosure from investment banks following the liquidity run on The Bear Stearns Cos. Inc. (BSC). “One of the lessons learned from the Bear Stearns experience is that in a crisis of confidence, there is great need for reliable, current information about capital and liquidity,” SEC Chairman Christopher Cox told reporters in Washington yesterday (Wednesday), Bloomberg News reported.