Is It Time for a New Nifty Fifty?

That term, popularized in the late 1960s and early 1970s, referred to a group of roughly 50 American blue-chip companies that were considered the premier franchises of the era.

Because they were established firms that were well-managed, global and boasting of well-defined growth prospects, the Nifty Fifty were viewed as “one-decision” stocks: You bought and held.

Greg Smith, Prudential Securities’ strategist, suggests that investors hunting for a theme could be primed to focus on a new Nifty Fifty today.

Some pros would argue that such a list already exists, if informally: Coca-Cola would be on it, for example, as well as cellular-phone giant Motorola.

But what happened to the old Nifty Fifty? The concept became a classic example of a logical investment idea that Wall Street took to excess.

In 1972, the Nifty Fifty included names like Avon Products, Kodak and Clorox. They were all solid businesses, but as their popularity grew the stocks were bid up to stratospheric levels relative to earnings per share. Avon’s price-to-earnings multiple hit 64 in 1972. McDonald’s reached 83.

Not surprisingly, when the U.S. market crashed 45% in 1973-74, the absurdly overpriced Nifty Fifty stocks led the collapse. Many have never fully recovered.

Could a new Nifty Fifty suffer a similar fate? Maybe. But analysts note that today’s blue-chip stocks would have to rise dramatically to even approach the outrageous P-Es of 1972. In other words, these stocks may yet go to wild excess--but we’re not there now.