About 30 percent of the 125 firms that have been added to the tech-
nology sector of the S&P 500 Index since 1957 were added in 1999 and
- Needless to say, most of these firms have greatly underperformed
the market. The telecommunications sector added virtually no new
firms from 1957 through the early 1990s. But in the late 1990s, firms such
as WorldCom, Global Crossing, and Quest Communications entered the
index with great fanfare, only to collapse afterward.
Of all 10 industrial sectors, only the consumer discretionary sector
has added firms that have outperformed the first firms put into the
index. This sector was dominated by the auto manufacturers (GM,
Chrysler, and then Ford), their suppliers (Firestone and Goodyear), and
large retailers, such as JCPenney and Woolworth’s.
CONCLUSION
The superior performance of the original S&P 500 firms surprises most
investors. But value investors know that growth stocks often are priced
too high and often induce investors to pay too high a price. Profitable
firms that do not catch investors’ eyes are often underpriced. If investors
reinvest the dividends of such firms, they are buying undervalued
shares that will add significantly to their final accumulation.
The study of the original 500 companies also gives you an appreci-
ation of the dramatic changes that the U.S. economy has undergone in
the past half century. Notwithstanding, many of the top performers are
producing the same brands that they did 50 years earlier. Most have ag-
gressively expanded their franchise internationally. Brands such as
Heinz ketchup, Wrigley gum, Coca-Cola, Pepsi-Cola, and Tootsie Rolls
are as profitable today as they were when these products were launched,
some over a hundred years ago.
But we also see that many companies make good investments by
being merged into a stronger company. And four of the top-performing
original companies—Dr. Pepper, Celanese, National Can, and Flintkote—
are now owned by foreign companies. In fact, it is more likely than not
that the future winners among companies that are currently American
based will not be headquartered in the United States. Foreign firms,
clearly secondary when the S&P 500 Index was founded in 1957, are apt to
be the ultimate owners of many of today’s top firms.
64 PART 1 The Verdict of History