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There seems to be a general misconception, especially among non-investors but even among some supposed investors, that stock performance is directly related to company performance. In a rational world, stock prices would reflect company performance and future expectations, adjusted for risk. In this world, stock prices reflect human psychology, and are only indirectly related to actual company performance.

Some people who are inexperienced with investing may view a rising stock price as direct evidence that the company is performing well. Similarly, they may conclude that if a stock price is falling, the company has performed poorly. In reality, a company can perform quite well while its stock does not. Consider the following five examples:

Wal-Mart (WMT)

Have a look at the long-term Wal-Mart stock performance.

Wal-Mart must have performed pretty poorly to have 10 years of no stock growth, right?

Apparently not. Wal-Mart grew its net income from approximately $6.3 billion in 2001 to $14.3 billion in 2010. That represents earnings growth of nearly 10% compounded annually. Earnings-per-share grew even faster due to share repurchases, and the company paid a dividend for the whole period as well.

Coca Cola (KO)

Have a look at the long-term Coca-Cola stock performance.

Coke’s chart is even more depressing than that of Wal-Mart. The company must have made some huge mistakes.

As it turns out, Coke grew its income from approximately $2.2 billion in 2000 to $6.8 billion in 2009. That’s more than 13% annualized earnings growth. And Coke paid dividends the entire time as well.

Microsoft (MSFT)

Have a look at the long-term Microsoft stock performance.

That poor stock trend must be well-deserved. Throughout this decade, Microsoft has failed to stop Google (GOOG) and Apple (AAPL) from attacking its moat and market dominance.

Turns out that Microsoft didn’t perform so badly. Microsoft grew net income from approximately $7.3 billion in 2001 to nearly $18.7 billion in 2010. That’s a growth rate of 11% annually, plus dividends for part of that time. EPS actually grew at a rate of 14% due to share repurchases.

Johnson and Johnson (JNJ)

Have a look at the long-term Johnson and Johnson stock performance.

That’s a little better, but still pretty flat. By the appearance of it, Johnson and Johnson must have had fairly mediocre company performance.

Actually, the health care juggernaut performed exceptionally well. JNJ managed to turn 2000 earnings of $4.8 billion into nearly $12.3 billion in 2009. This represents 11% annualized earnings growth. In addition, they of course paid dividends to shareholders each year.

Medtronic (MDT)

Have a look at the long-term Medtronic stock performance.

I’ll skip the sarcasm this time: They did great.

Medtronic grew net income from a little over $1 billion in 2001 to nearly $3.1 billion in 2010. That’s more than 13% annualized growth, and they paid dividends as well.

What happened?

What do these five companies have in common? They were all drastically overvalued 10 years ago. These companies have all performed very well financially over the past 10 years, and yet their stocks have gone nowhere. This illustrates perfectly the “lost decade” of investing.

Investors a decade ago saw the bright futures of these five remarkable companies, and they paid a premium for shares of them. Unfortunately, they drastically overpaid, and therefore their returns were lackluster. Value investors, on the other hand, wisely understand that regardless of how well a company is performing, their stocks must be purchased at a reasonable price.

People claim buy-and-hold is dead. It’s not dead. You simply have to do it correctly by buying great companies at reasonable prices.

All of these companies have great valuations right now. Some of them have some pretty big obstacles ahead, so it’s important to investigate them thoroughly, but in general the values now are much more reasonable than they were in years past.

Company Current P/E
WMT 14.1
KO 19.3
MSFT 11.5
JNJ 13.2
MDT 11.2

Disclosure: I own shares of KO and JNJ. I have no position in any of the others, but MDT is on my buy list and MSFT and WMT are on my watch list.

Source: 5 Dividend Stocks That Haven't Moved in a Decade