Is a Good Company a Good Stock?

While working out the other day, there was a guest on CNBC who mentioned that the stock price of four tech stalwarts was lower today than it was ten years ago.  The companies are Dell; Cisco Systems; Microsoft; and Intel.

Over the years I’ve heard it said that good companies are not always good investments.  I’ll leave it to others to define “good company,” but these four firms are certainly prominent in their industries.

Morningstar’s Advisor Workstation has a function that takes the value of $10,000 invested in a stock or fund and calculates the ending value over a given holding period.  I looked at the value of $10,000 invested in each of these stocks on May 1, 2001 and held to April 30, 2011.  The ending value is a total return calculation which includes both price appreciation and income such as dividends.  The April 30, 2011 values:

Dell                    $5,885

Intel                     8,873

Microsoft             9,637

Cisco                 10,354

 

By comparison, a $10,000 investment in the Powershares QQQ which tracks the 100 largest non-financial stocks on the NASDAQ and is about 60% in technology would have grown to $13,293 as of April 30.  An investment in the SPDR S&P; 500 ETF would have grown to $12,967.  While the return on either of these ETFs is nothing to brag about, investors would have fared better than in any of these four stocks.

The flip side of this, of course, is Apple.  A $10,000 investment on May 1, 2001 that was held to April 30, 2011 would have grown to $274,693.  This shows that picking the right stock can be lucrative and that good companies can be good investments.

As a financial advisor I stay away from individual stocks in favor of mutual funds and ETFs.  While evaluating funds and ETFs does take work, they are great tools for the long-term asset allocation and rebalancing strategies that I employ with my clients.

None of the above is to say that any of the stocks or ETFs mentioned are or are not good investments.  Certainly investors have made or lost money on all of these holdings depending upon their holding periods.

This does bring to mind a quote by my partner in a new 401(k) advice service.  “The best time to determine when to sell a stock is before you buy it.”  We are not advocating frequent trading, but we find that many stock investors do not have an exit strategy.  Often investors can sense when a stock is a good buy, far fewer know when it is time to sell.

Please feel free to contact me with your investing and financial planning questions.