The Nifty 50 was a group of 50 stocks that were most favored by institutional investors in the 1960s and 1970s. Companies in this group were usually characterized by consistent earnings growth and high P/E ratios.
Breaking Down Nifty 50
Examples of Nifty 50 stocks included General Electric, Coca-Cola, and IBM. However, part of this list included companies that have been troubled in the last decade, such as Xerox and Polaroid.
Nifty Fifty Stocks and Price-to-Earnings (P/E) Ratios
Historically nifty-fifty stocks were favored in part due to their high price-to-earnings or P/E ratios. P/E ratios compare a stock’s current market value (price) to its earnings-per-share. Earnings are the company’s net profits, which the CEO and investor relations team announce each quarter on the company’s earnings conference call. The P/E ratio indicates the dollar amount an investor should invest in a company to receive one dollar of that company’s earnings. The P/E is thus sometimes referred to as the price multiple.
Today high P/E/ ratios, such as with many technology companies (e.g., Tesla’s [TSLA] forward P/E of 1380) can indicate volatility and a lack of stability. If the company’s price is significantly higher than its actual concrete earnings, this imbalance could suggest investors have over-hyped the company. If the company fails to generate profits, investors who have purchased the stock at a high valuation could see their holdings decline if the market catches on and price drops accordingly.
Nifty Fifty and Today’s Blue Chip Stocks
Today’s blue-chip stocks in several ways resemble the nifty fifty stocks of prior decades. Blue-chip stocks are nationally recognized, well-established, and financially sound companies such as Coca-Cola, Disney, PepsiCo, Wal-Mart, General Electric, IBM, and McDonald’s. Dominant in their respective industries, many of these names overlap with those in the nifty fifty. Blue-chip stocks represent highly reputable brands and have survived multiple downturns in the economy over the years.
Investors with a low-risk profile (e.g., more conservative or potentially older investors, nearing retirement and looking for stability) often place their assets in blue-chip stocks. These are excellent options for capital preservation. Steady dividend payments provide a stream of income if the investor does not have a salary and also protects the portfolio against inflation.