Ten Years And No Return

Coke, Pfizer, IBM... these and other US stocks now trade at prices first seen up to ten years ago!

It's not just well-known FTSE shares that are among the market letdowns from the last few years. Some of the biggest names in the Dow Jones index have disappointed loyal shareholders, too.

Check out this table:

Some dismal returns there. Seven, eight, nine -- even ten! -- years is a very long time to invest without notching up a capital gain. Especially given the archetypcal 'buy and forget' nature of the stocks in question!

Although some of the seven companies have suffered the odd earnings blip in recent years, I think it's important to note all of them are more profitable now than they were back in the Nineties.

Going on current forecasts, Microsoft for example looks set to record earnings per share (EPS) of $1.45 in the current year -- more than triple the $0.45 set in 1998. Meanwhile, EPS at Wal-Mart is predicted to come in at almost $3 -- more than double the $1.28 registered seven years ago. Furthermore, Coke, Disney, IBM, McDonald's and Pfizer are likely to have improved EPS between 60% and 100% since their stock prices first hit their present levels.

So with earnings having increased quite significantly, buyers of these shares must have gone wrong with valuation.

You see, everybody piled in to mega-cap 'quality' stocks during the mid-to-late Nineties and the enthusiasm pushed price to earning (P/E) ratios well above historical norms. However, the subsequent bear market and/or lower corporate growth prospects have caused all seven P/Es to decline and counterbalance the improvement in earnings:

The simple lesson from all this is that a good company can only become a good investment if it is bought at a good price. If the P/E is high -- i.e. it's already pricing in plenty of earnings growth into the future -- then your long-term returns may be compromised.

But looking at those stocks today and the generally modest P/Es of between 13 and 20, I'd say the probability of the group as a whole recording a decent capital gain during the next seven to ten years is good. So much so, I've even recommended one of the seven stocks for Champion Shares.

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