'Good to Great' Stocks: Where Are They Now?

Did you have an experience like me around the beginning of 2002? Did your boss start speaking a whole new dialect of Dilbert-esque management buzzword lingo? Did he declare "We need to be more like hedge-hogs and less like foxes" in the middle of a meeting one day? Was he talking about cave-man era contraptions like fly-wheels and doom-loops? Did he go on and on about getting the right people on the right seats in the bus? Did he stress the importance of "confronting the brutal facts"? If so, you must have had a brown-nosing colleague like I did who gave the boss a copy of Jim Collins' wildly popular management book Good to Great for Christmas just after it was published in October 2001.

The basis for the book is a gargantuan study that Mr. Collins and his team performed of 1,435 publicly traded companies. They eventually settled on 11 companies that out-performed the market by at least 3 times over a period of at least 15 years - a pretty tall order. These were the companies that supposedly went from "Good to Great".

Now for the brutal facts - two of the companies on the list were none other than The Federal National Mortgage Association (Fannie Mae) (FNM) and Circuit City (CCTYQ.PK). Heard about them in the news recently? Only six years after being decorated with such accolades, both companies have lost 99% of their value.

Ouch....

Talking heads on financial television recently have been pontificating that "buy and hold" investing is dead. The downward spiral of once high-flying stocks like FNM and CCTYQ.PK go a long way in making their point. I'm not a big Jim Cramer fan but one of his rants that rings true with me is the idea that you should practice "buy and home-work" (study the financials of stocks you own, read the quarterly conference call minutes, etc.) in lieu of "buy and hold."

On the brighter side, two other companies on the list that have weathered the storms and will likely prosper in the future are Wells Fargo (WFC) (up 56% since the book was published) and Nucor (NUE) (up 260%).

So what's the trade? If you own stock in one of the companies that made the transformation from "Good to Great", it might still pay to have some down-side protection. Say you're long 1,000 shares of Wells Fargo. Why not buy 10 protective puts at a strike price around half the current share price with an expiration as much as a year away if you really want to hold on to WFC long term? With WFC trading around $30, a January 2010 $15 put would cost you about $350 per contract. Your cost to protect your $30,000 position in WFC for a little over a year would be around $3,500 - a little more than 10%.

This may seem a steep price to pay but there are three things to keep in mind.

1. With today's volatility, a financial stock like WFC is likely to either take-off and surge 50% over the next year or go in the tank even further.
2. WFC's dividend is currently yielding around 5%. Consider this as cutting your protective put cost in half.
3. Lastly, as the financial crisis slowly passes, volatility will certainly decrease and the cost of protective puts will go down substantially in the future.

Disclosure: no positions held in any stock mentioned

Comments

[justapirate:]

What a stupid idea. Your loss percentage possibility is about 98%. Buying out of the money puts is the single worst investment that there is. Period. Pros only SELL!!! out of the money puts. What an uniformed person!!

justapirate(exspeciali... ex CBOE marketmaker, ex index marketmaker in NY, ex trader for C.Munger. Again...this guy is a dope.

2008 Dec 08 07:58 AM

[selene:]

I can't say whether or not he is a dope about the put strategy. But he is SPOT ON about that dumb book. The most ironic thing in it is the "Stockdale Syndrome," where like Stockdale in the POW camp, those who face bad situations realistically survive. Great concept but AFAIK universally non-implemented by every organization I know that was big on this book.

2008 Dec 08 10:16 AM

[sumosama:]

AMEN, Glenn! Had to read that stupid book and abide by its mantra for a month or two. Even got a stuffed hedgehog out of the deal!

I did a study about a year and a half ago, BEFORE all this turmoil, based on where the stocks were when he wrote the book, and where they were when we were mandated to read it. Synopsis...SEVERELY underperformed the market!!! And that was BEFORE the recent calamites.

BTW, feel free to add WFC to the list of gone nowhere stocks during that time period (although I am long a BUNCH of WFC!!!).

2008 Dec 08 12:54 PM