Big Growth Stocks: Dead Money for How Much Longer?

Remember the invincible multinational blue-chip growth company--the “one-decision” stock you bought, say, two years ago, with the idea of holding it forever?

Well, two years into forever, let’s see where we stand:

* Walt Disney Co. Price at the beginning of August 1997: $26.94. Price now: $27.19. Grand total percentage gain in two years: 0.9%.

* Gillette Co. Price then: $49.50. Price now: $45. Shareholders are down 9%.

* Coca-Cola Co. Price then: $69.13. Price now: $59.81. Shareholders are down 13.5%.

* Philip Morris Cos. Price then: $45.13. Price now: $35.38. Two-year net loss: 21.6%.

And last week, in what turned out to be a bullish five days for stocks overall as inflation fears waned (the Dow industrials jumped 2.4% for the week, to 10,973.65) yet another multinational growth stock star crumpled.

Bleach king Clorox Co. warned investors on Thursday that weaker-than-expected sales will depress earnings for the next two quarters. For the week, Clorox shares dove 18%.

For Disney, Gillette, Coke and Philip Morris, measuring from August 1997 may seem unfair. After all, that was when the Asian economic crisis began to unfold in earnest. Naturally, multinational U.S. companies with significant interests in Asia would be vulnerable.

But the blue-chip Standard & Poor’s 500 index, which includes those four stocks and many other multinationals, is up 39% from early August 1997, a gain that makes the performance of the four giants look even worse.

What’s more, Asia has been in recovery mode since at least spring, which has registered in the shares of many multinational stocks but not in names like Coke and Gillette.

Certainly, higher interest rates and the stronger dollar also have weighed on Coke and its peers this year. But every other multinational has faced the same challenges.

Shares of McDonald’s Corp., for example, are down 16% from their record high reached in the spring. But McDonald’s share owners still have a 49% paper gain measured from early August 1997.

Maybe the aforementioned four were simply overpriced two years ago? They must have been. But overpriced growth stocks have been the rule rather than the exception for the last few years. That wasn’t a unique characteristic in the summer of 1997.

The market’s problems with Disney, Gillette, Coke and Philip Morris, then, must reflect issues that are more company-specific than generic. In other words, that there’s something wrong with the basic businesses, or the business plan execution by management.

Philip Morris’ major problem is well-known: The tobacco liability issue just won’t go away. What’s interesting is how many investors must have been convinced two years ago that the tobacco industry would figure a way to dispose of the liability problem and still prosper. Now investors clearly have much less confidence in Big Tobacco’s ability to control its own destiny.

An aura of invincibility also surrounded Disney, Gillette and Coke two years ago. The bullish story was the same in each case: They were magnificent global brand names, they were far ahead of their competitors in their principal businesses, they had the financial power to extend their reach in any market, and they had all sorts of levers they could pull to keep their businesses on track.

Wasn’t the appeal of being a blue-chip multinational that a downturn in any one global region, or in one business sector, would be offset by strength elsewhere?

It hasn’t worked out that way for Disney, Coke or Gillette. Disney’s operating profit was down 17% in the nine months ended June 30 versus the previous year. Coke’s operating earnings in the six months ended June 30 were down 9%; Gillette’s were down 9% as well.

Yes, Asia was still a problem in the first half, relatively speaking. But most of the rest of the world was still in an economic expansion.

Disney, Coke and Gillette have been favorites among individual investors for a long time. Each also is a major holding of billionaire Warren Buffett. No doubt many small investors figure that if the stocks are good enough for Buffett, they ought to be good enough for all aspiring billionaires.

That is not, however, how John Tilson sees it. The co-manager of the Pasadena-based Phoenix-Engemann Nifty Fifty stock mutual fund--which, as the name implies, aims to invest in a select group of stocks with superior prospects--no longer owns Gillette. In the last two years, the razor giant had ranked as Nifty Fifty’s No. 1 holding. Likewise, Tilson has jettisoned Philip Morris from the $450-million fund.

With Disney, Coke, Gillette and others, Tilson says, “we have trouble finding a common thread” to explain their woes. Market saturation? Unexpected competition? Poor decision-making? What he does know, he says, is that “these companies aren’t getting the growth” they had expected.

So Tilson and many other big investors have gone elsewhere--into technology and telecom stocks in particular. Widespread disappointment with the multinational consumer giants also may account for the broadened market rally this year, lifting “value” stocks, industrial names and smaller stocks.

Investors who still own the consumer giants must assume that the only issue is time: How long before the companies get back on track?

Warning: History isn’t encouraging. Even high-quality stocks can be dead money for a long, long time. After the major drug stocks peaked in early 1992, it took nearly four years for them to get back to even. Wal-Mart was dead money from late 1993 to early 1997.

Buffett has the patience of a saint. Saints are pretty rare.

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Tom Petruno can be reached at tom.petruno@latimes.com.