What was the Nifty 50
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.