Who Says Stocks Can't Beat Inflation?

While the Consumer Price Index grew by 25%, stock prices of the original INC. 100 nearly doubled.

 

When INC. compiled its first listing of the country's 100 fastestgrowing publicly held small companies in April 1979, there were many unanswered questions. Could the meteoric growth rates -- a median 44% compounded annual growth in sales during each of the previous five years -- be sustained? Or would a number of these small high-fliers fall by the wayside? Most important for investors, how would these young companies, for the most part thinly capitalized, fare in the open market? Would spectacular growth be rewarded with appropriate increases in stock prices?

Two years is not a long history, but it is more than adequate time to establish long-term capital gains and losses under current laws. And for anyone who invested across the board in the original INC. 100 stocks back in May 1979, "gain" ought to be emphasized in capital letters today. If you had invested $10,000 in the group on May 1, 1979 -- $100 in each stock -- you would have made a handsome profit of $9,903 if you sold on May 1, 1981 -- a 99% gain in just 24 months. This enviable record was posted even while the investment community and the public wondered whether common stocks would ever again be the inflation hedge they were during the early 1960s. Based on this group of stocks, anyway, the answer would appear to be an emphatic "yes."

If you decided not to sell your hypothetical unweighted portfolio of the original INC. 100, you would today own 85 stocks from the 1979 group. Of the 15 companies that have disappeared from the original list, only one (Med General, #7) went the way of bankruptcy. Stockholders of 6 other companies received healthy cash payments for their shares in merger transactions, and 7 more names from the original list merged into larger companies on the basis of stock swaps. Ten companies -- Tandem, Cray, Volunteer Capital, Wainoco Oil, Prime, Rampart General, Econo Therm Energies, Tomlinson Oil, Rolm, and Golden Oil -- have appeared on each of the three INC. 100 lists so far compiled, proving that even spectacular growth can sustain itself for a number of years.

The accompanying bar chart shows that the American Stock Exchange Index, increasing over the period by 93%, almost equaled the 99% growth of ine INC. 100 stocks. This strong showing, not repeated in comparative studies of the major indices with the 1981 and 1980 INC. 100 lists (See INC., May, page 161 and June, page 126) can be largely attributed to the rapid price increases of smaller domestic and Canadian oil stocks traded on the Amex during the period. Once the oil group backed down, as it has during the past several months, the NASDAQ Composite became the only index to give the INC. 100 "average" a modest run for its money.

As for the Dow Jones Industrials, its annual compound gain of 8% for the two years suggests what investors are thinking of when they complain that common stocks can't keep pace with inflation. That surely doesn't seem to be the case with smaller growth stocks -- tight money and an uncertain economic climate notwithstanding.