The nifty 50 companies were the most popular stocks of their time in the 1960’s and 1970’s. These 50 companies were growing so fast that investors bought them at any price, even at high P/E ratios.
There were valid reasons behind these high P/E (Price to Earnings) ratios.
But, as we’ll uncover today, the results were very much a mixed bag. In this post, we will look at:
- An intro to the “Nifty Fifty”
- The performance (results) of high P/E nifty 50 companies
- Examples of the actual P/E ratios of these stocks
- Comparing the Nifty Fifty P/E’s with P/E’s today
Let’s dive in.
Intro: Getting a Sense of the Nifty 50 Phenomenon
As Howard Marks (the legendary investor who started his career in the “go-go 1960’s”) explained in his 2021 memo called Something of Value:
“Investor interest in rapid growth led to the anointment of the so-called Nifty Fifty stocks… This group comprised the fifty companies believed to be the best and fastest-growing in America: companies that were considered so good that ‘nothing bad could happen to them’ and ‘there was no price too high’ for their shares.”
The justifications of the super high P/E ratios of these nifty 50 companies mirror the ones you hear for growth stocks today—that if you just buy and hold these superior (“blue chip”) stocks forever, you will find great returns.
This narrative was magnified by the fact that the best performing fund managers were the ones who held Nifty 50 stocks in their portfolio; those who didn’t got left behind.
Wikipedia describes these stocks as termed “one-decision” in their time, meaning you simply buy and hold these great growth stocks at any price.
However, there are many instances throughout history where buying stocks with high P/E ratios doesn’t turn out well.
The Nifty Fifty craze was no different.
A Wide Range of Results for High P/E Nifty 50 Companies
Let’s go back to what Howard Marks said about the results of the Nifty Fifty group, from a man who lived through it in the trenches.
I’ll bold what I find really compelling:
“Like the objects of most manias, the Nifty Fifty stocks showed phenomenal performance for years as the companies’ earnings grew and their valuations rose to nosebleed levels, before declining precipitously between 1972 and 1974. Thanks to that crash, they showed negative holding-period returns for many years.”
Yet there was a dichotomy in the results of this group of 50, as Marks continues to reminisce (bolded emphasis mine again):
“It’s worth noting, however, that the truly durable growth companies among the Nifty Fifty—about half of them—compiled respectable returns for 25 years, even when measured from their pre-crash highs, suggesting that very high valuations can be fundamentally justified in the long term for the rare breed of company”.
Another notable writer on investments, Jeremy J. Siegel, wrote this about the performance of the Nifty 50 stocks in his book Stocks for the Long Run:
“If you examine the actual P-E ratio of the Nifty Fifty stocks, the 25 stocks with the highest ratios (averaging 54) yielded only about half the subsequent return as the 25 stocks with the lowest low P-E ratios, whose P-E averaged 30. So although these growth stocks as a group were worth more than 40 times earnings, they should not be considered buys ‘at any price’.”
And to reinforce the idea from Howard Marks about a rare breed of performers, Siegel added (bolded emphasis mine):
“Those stocks that sustain growth rates above the long-term average are worth their weight in gold, but few live up to their lofty expectations”.
However…
What’s also interesting about one of Siegel’s findings was that from the time period December 1972 to June 1997, non-rebalanced portfolio of Nifty 50 companies returned 12.4% annualized, versus 12.9% for the S&P 500.
Companies like Coca Cola and Merck & Co returned over 16% annualized despite P/E ratios above 40, while the rest of the top performers (16%+ annualized) had P/E’s around the 23-29 range.
Siegel found that technology stocks got slaughtered despite their dominance in the 1960’s, while consumer brands companies did excellent as a group.
It turns the classic growth vs value debate into focus once more.
One of the big takeaways from the high P/E Nifty Fifty rise and fall seems to remain true for many growth stocks today.
Mainly…
- Expensive growth stocks were statistically likely to underperform.
- More growth stocks will tend to underperform than not.
Yet, there will be enough outliers—with such fantastic returns—to continue to drive the (anecdotal) narrative that price doesn’t matter, because a rare breed of business was able to prove so.
It is a story that will probably never die.
Most growth stock investors like to believe they will be the ones successful enough to pick out the fabulous winners in advance.
But statistically, the majority of investors thinking this way will not.
Like described earlier, the Nifty 50 narrative really turned to a bit of a mania as Wall Street deluded themselves. Siegel relays:
“Because their prospects were so bright, many analysts claimed that the only direction they could go was up. Since they had made so many rich, few if any investors could fault a money manager for buying them. At the time, many investors did not seem to find 70, 80, even 100 times earnings at all an unreasonable price to pay for the world’s preeminent growth companies.”
As with many manias in the economy and stock market throughout history, a sweeping of greed on Wall Street leads to poor returns in the future, when investors think “this time is different” and are willing to pay any price (even if ridiculously expensive) for an asset.
Great growth trends in price can continue for a long time, making many people wealthy on paper, but eventually many people are also left “holding the bag” as the price crashes, time and time again.
Examples of the P/E Ratio of Nifty 50 Stocks
Alright, let’s dig into some of the actual P/E ratios of some of these companies, which is admittedly quite hard to find online.
Siegel’s list is excellent, and I recommend buying the book (Stocks for the Long Run) if you are interested in that.
For this list today, we will look at the 1968 period, a few years before the ultimate peak and crash.
I will combine a table from CNN Money on the Fortune 500 list, with a vintage Standard & Poor’s Stock Guide from 1971. This stock guide has information on the price, dividends, balance sheet, and earnings per share of the stocks in the S&P—yes they printed it all out before the days of the internet and Google Finance.
Let’s go down the Fortune 500 list, starting with the highest revenues first, trying to only include those stocks considered Nifty 50 companies at the time. The P-E ratio was printed in the stock guide for February 1971, which appears to take earnings for 1970 as the denominator.
#4 – General Electric
- $7.7 billion in sales
- P-E ratio = 32
#7 – International Business Machines (IBM)
- $5.3 billion in sales
- P-E ratio = 36
#27 – Procter & Gamble
- $2.4 billion in sales
- P-E ratio = 21
#29 – Eastman Kodak
- $2.3 billion in sales
- P-E ratio = 29
#53 – Dow Chemical
- $1.4 billion in sales
- P-E ratio = 18
#65 – 3M
- $1.2 billion in sales
- P-E ratio = 30
#78 – Coca-Cola
- $1.0 billion in sales
- P-E ratio = 35
What I found interesting from compiling this list was how many of the Nifty Fifty were actually not at the top of the Fortune 500 list in regards to biggest companies by sales.
Rather, what seems to put these companies in the same category was a combination of high EPS growth rates and high P/E ratios.
That’s a valuable distinction to remember; as from the surface, hearing just about the Nifty Fifty being “blue chip stocks” makes you think about the 50 biggest stocks rather than 50 fastest growing, even if those fastest growing are now “blue chips” today.
Nifty Fifty PE’s Adjusted for Today
Without getting too much into the weeds, we have to understand that P/E ratios are not only determined by earnings (or EPS) growth, but also the level of interest rates.
That’s because interest rates generally have a huge influence on stock prices.
(You can read about discount rates and DCF models if you are interested to learn why, but be warned it’s pretty high level material).
Like I wrote about in my article about the high flying IBM in 1968 compared to the FAANGs today, long term interest rates were around 6% compared to less than 2% today. That means that a 35 P/E back then would correspond to more like a 57 P/E ratio today if you adjusted the interest rate for a Discounted Cash Flow (DCF) valuation.
In other words, we should probably take a 1.6x multiplier on the P-E ratios of the nifty 50 companies shared above to get a true sense of just how expensive these stocks were.
#4 – General Electric
- Adjusted P-E ratio = 51
- Outperformed the S&P 500 in Siegel’s study? Yes
#7 – International Business Machines (IBM)
- Adjusted P-E ratio = 58
- Outperformed the S&P 500 in Siegel’s study? No
#27 – Procter & Gamble
- Adjusted P-E ratio = 34
- Outperformed the S&P 500 in Siegel’s study? Yes
#29 – Eastman Kodak
- Adjusted P-E ratio = 46
- Outperformed the S&P 500 in Siegel’s study? No
#53 – Dow Chemical
- Adjusted P-E ratio = 29
- Outperformed the S&P 500 in Siegel’s study? No
#65 – 3M
- Adjusted P-E ratio = 48
- Outperformed the S&P 500 in Siegel’s study? No
#78 – Coca-Cola
- Adjusted P-E ratio = 56
- Outperformed the S&P 500 in Siegel’s study? Yes
The Bottom Line: You see many comparisons between the Nifty Fifty stocks of the 1960’s and 70’s with the growth stocks of today, but I sometimes doubt those and especially after this research.
We may very well see a bear market or crash if interest rates rise too suddenly, and those views may seem justified.
But…
History doesn’t repeat but it does rhyme.
If the Nifty 50 stocks were trading at more reasonable levels—and maybe more reasonable “adjusted P/E” ratios to account for the higher interest rates of that time—maybe the reputation of the Nifty 50 companies would be regarded much more highly.
Maybe a new breed of Nifty 50 stocks may appear one day; but if they don’t reach similar “adjusted P/E” ratios like the Nifty 50 of the past, they may actually do very well over 10-20 years time, both statistically (probabilistically) and on aggregate.
Investor Takeaway
I hope that these findings create more questions than they do answers for your stock picking.
Because it pays to be curious and constantly learning.
Some of the best investors of all-time, like billionaire Warren Buffett and his business partner Charlie Munger, have talked many times about the importance of building and expanding a circle of competence.
In other words, find places where you can excel in learning about a company or industry, and use that knowledge to find great stocks to hold for the long term.
It’s not the most exciting or complex thing.
But it can be incredibly valuable, especially if you want to build sustainable wealth, and especially if you aren’t afraid to do the work of researching many ideas.
Use these lessons of the Nifty Fifty companies to expand your understanding of the stock market, and don’t be afraid to go back to the basics before trying to make a bunch of money. In fact, it should probably be a prerequisite before you really risk real money.
After all…
“A fool and his money are soon parted”.
