07 Oct 10 Stocks that Barely Lasted the Decade
On 14th August 2000, Fortune Magazine published an article entitled 10 Stocks to Last the Decade.
It started off by reminding investors of all the great growth stocks such as Microsoft and Intel they could have owned but have gotten away. The article further suggested that if an investor were to plonk a modest $5000 into companies Dell and EMC in 1990, closed their eyes and went to sleep for the next ten years, they would be worth $8.4 million then in 2000.
In a bid to sooth bruised egos and provide equity investors some hope, Fortune decided to take matters into their own hands and play God for the day. They identified four sweeping trends – communications networking, entertainment, financial services and biotech. These trends they claim, have the potential to transform the economy and the way we work and interact.
Not contented with identifying the over-ridding factors, they turned to four experts in an attempt to identify specific stocks. Fortune also did their due diligence by ‘pouring through financial statements, talking to companies, and giving their products a test run’. The end result – 10 stocks that will be winners over the coming decade.
It has been 15 years since the list was published. Let us have a look at how the stocks have performed.
In the year 2000, Fortune identified four companies that are best positioned to ‘cut through the clutter and make life and business easier’. They are Nokia, Nortel Networks, Enron and Oracle.
At the turn of the century, Finnish telecommunication handset maker Nokia was riding high on the wave of mobile proliferation worldwide. The following decade saw it struggling to retain market share against the onslaught of mobile devices produced first by Blackberry and subsequently market leaders Apple and Samsung. The stock was trading at $54 at the time of the Fortune article. On 15th September 2015, it closed at $6.60, a pale shadow of its former self.
It is some consolation that Nokia is still in business.
The next pick on the list Nortel barely made it past the decade. It filed for bankruptcy protection and was wound up in 2009. Interestingly in 2001 barely a year after the original article was published, then CEO Frank Dunn had to preside over a restructing exercise that saw sixty thousand employees being laid off and a write down of $16 Billion in Nortel’s books. So much for the vote of confidence from the experts.
Number three on the list is a company that requires no further introduction –Enron. Synomous with accounting scandal and fraud, it not only went bust in 2001 but it also made a loud sound and a big hole in the ground on its way down. Investors looking to buy and close their eyes for their decade long nap would be rudely awoken.
If we had to look really hard to find a redeeming factor in this communications technology sector, we might be able to find it in Larry Ellison’s Oracle. In August 2000, the enterprise software product maker traded at $74. Just after the article was published, the stock underwent a 2 for 1 split.
15 years later as we speak, the stock closed at $38. Technically speaking, excluding dividend payouts, an investor who bought and held Oracle would have achieved capital gains of 2.7% for the entire period.
Hardly anything to crow about but against your friends who had bought the Nokia, Nortel and Enron, you will be the one buying the beers for sure.
Perhaps Fortune has been wrong footed with the upheaval in the communications technology industry. Let us turn to the sector they call ‘The Entertainers’ and see if we can find some joy and laughter.
The Los Angeles company’s products has been touted as ones that will ‘power the entertainment revolution’. From dizzling heights of $237 in 2000, the share price has since wittered to close at $54 in September 2015. Even taking into account the 3 for 2 stock split in 2006, an investor who had bought into Broadcom would be left with one third of his original investment.
Another pick that depleted two thirds of investors wealth is Univision. The Spanish language television producer entered the fray at $113. Seven years later it ended up being acquired by a consortium for $13.7 Billion, or a palty $36 per share.
Finally, if there is anything entertaining about the entertainers, one might find it in the Viacom/CBS affair. In 1999, Viacom announced a merger with its parent company CBS. Fast forward to March 2005, Viacom announced plans to split the company into its original components once again. The break up eventually took place in December that year. The original Viacom will formally be known as CBS and the new spinoff company has been named, drumroll please – Viacom.
Fortunately for investors, they did not have to take sides in this scruffle. Each share of the original Viacom entitles the owner to half a share each of the companies Viacom and CBS. The old Viacom traded at $69 in August 2000. In September 2015, shares of the new Viacom and CBS both traded at $44.
Other than being entertained by that little bit of drama, investors are definitely below water on this one.
If Communications and Entertainment are both not their strong suit, the least Fortune could do is to get their own industry right.
For finance, they picked online broker Charles Schwab. The firm was best positioned to capture the huge influx of baby boomers who will trade shares online and their billion dollar acquisitions at the turn of the century looked really promising. Unfortunately the promises hardly materialised. The share was trading at $36 then and at $31 now.
Morgan Stanley Dean Witter
Now, if an institution riding on new technology to build its business did not do well, perhaps a traditional investment bank would prosper and bring joy to its shareholders?
Once again, the disappointment was palpable. Present day Morgan Stanley, then known as Morgan Stanley Dean Witter, a legacy financial institution founded in 1935 and the market leader in investment banking and capital market financing was Fortune’s pick.
The stock was not spared in the 2008 Global Financial Crisis. Emerging from the carnage where it lost over 80% of its value, it now trades at $35, a pale shadow of its former $89 self in 2000.
I hear sighs of relief all around – they could have picked Lehman Brothers and it would have been a lot worse.
The only bright spark in the entire portfolio would have been Californian based Genentech. It emerged from a rather messy takeover bid by Swiss based pharmaceutical giant Roche in 2009 where it was acquired for $95 per share.
While the price is theoretically below the $150 it was trading at initially, it has since undergone a couple of stock splits in October 2000 and May 2004. Because of that, the investor who owned one share in 2000 would have owned four in 2009. His initial investment would have seen a 250% return over the decade.
Out of the ten carefully curated stocks, eight of them are now trading below their what they were in 2000. Enron and Nortel went bust. Oracle eeked out a 2.7% gain while Genentech was the star performance in the stable.
Without taking into consideration dividends, an investor who had invested a million dollars in a portfolio of all ten stocks in the year 2000 would have seen his investment dwindle to $624k.
This is assuming there is equal weightage for all the stocks.
Removing Genentech from the equation, one would barely have $370k left in the pot.
Once in a while, I would bring out the article and savour it all over again.
The justification behind the stock picks are so convincing, it is almost inconceivable that they can turn out so wrong. The elements of tragedy and comedy are closely intertwined, and it will go down into history as a classic (if it is not one already).
Beyond that it is a stark reminder for myself and for all investors alike about the fickleness of markets and the fallibility of ‘experts’. For every expert that has a sexy growth story to sell, I have a Fortune article to tell them otherwise.
As Warren Buffett famously said –