We See Dead Stocks

The second kind of dead stocks are the share prices of the companies which succeed as businesses for decades to come, but the euphoria/excitement which became attached to them doomed the shares for ten to twenty years. Among the Nifty-Fifty which fit this description were Disney (DIS), McDonald's (MCD) and Coca Cola (KO ). The stocks were dead for at least ten years and saw their price-to-earnings ratio (P/E) plummet from around 70-80 times to single digits in 1981-1982.

The most successful businesses from among the glamour euphoria stocks of the tech bubble were Microsoft (MSFT), Cisco (CSCO) and Intel (INTC). The P/E ratio based on 2000 fiscal year earnings at the end of the mania on MSFT was 65. CSCO peaked at a P/E of 222 and INTC topped out at 48 times profits of its outlier profit year, but it was 110 times the average of the three years surrounding its peak price. The profits and free cash flow of these survivor companies have grown massively over the last 19 years. Those earnings stats didn’t stop the common shares of these companies from declining by 65% on MSFT, 89% on CSCO and 82% on INTC. To think that numbers like this didn’t cause nightmares, leading index and growth investors to see ghosts, means folks have short memories. It took 16 years to get back to the old high on MSFT and you have never been back to the 2000 high on CSCO and INTC! Have you ever heard of purgatory? Little Cole had some contemporaries.

If these stocks were dead in 1999, long before they peaked, how did investors stay sucked into their morbid vortex during the main part of the death spiral in 2000-2002? The answer was many violent bear market rallies in these stocks on the way down. Here is the chart of MSFT during the worst of its decline:

Source: Bloomberg. Data for the time period 12/31/1999 – 10/2/2002.

On the way down there were three bear-market rallies of 25%, 33%, and 40%. Two more rallies of 78% and 41% were included in the final bottoming process.

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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Cynthia Decker 10 months ago Member's comment

Great title.