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Another reason to beware of 'religion' stocks

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Today, I'll continue the conversation on why you need to be cautious when it comes to "religion" stocks...

In yesterday's e-mail, I shared my friend Vitaliy Katsenelson's 20-year-old article, The Hidden Risk in "Religion" Stocks, and argued that it could have been written today because I see investors overpaying for "one-decision stocks" that are "lifted up to 'religion' status."

I then tracked the performance of one stock Vitaliy mentioned in his article, Coca-Cola (KO), since March 22, 2004. I showed that, despite Coke continuing to be one of the best businesses in the world, its stock, with dividends reinvested, has only roughly matched the S&P 500 Index.

"But," you might be thinking to yourself, "I wouldn't have bought Coca-Cola, I would have been clever enough to buy and hold Apple (AAPL) or Amazon (AMZN)."

That would have indeed been a life-changing decision, as these stocks are up nearly 50,000% and nearly 10,000%, respectively, since late March 2004:

But count me skeptical...

If we're talking about "religion" stocks, Apple and Amazon were a far cry from that in early 2004.

As you can see in this chart, in the previous five years, both of their stocks had boomed during the Internet bubble and then crashed hard:

If one were buying a "religion" stock in the tech sector back in March 2004, it would likely have been the bluest of blue chips: IBM (IBM) (unless you had read my four articles I wrote for Motley Fool from January 2000 to this one on February 20, 2002, IBM's Accounting Tricks, warning investors to stay away).

As you can see in this five-year chart from late March 1999 to late March 2004, IBM had weathered the tech bust well – outperforming the tech-heavy Nasdaq Composite Index:

But buying the stock and holding on all this time would have been a dreadful mistake... as IBM has underperformed terribly since then. Over the past two decades, its revenues are down 35% and its profits have barely budged:

Not surprisingly, the stock has underperformed badly since late March 2004 – rising only 154% (362% with dividends reinvested), far below the 846% return of the Nasdaq:

In conclusion, in yesterday's e-mail I wrote that "the lesson here is that if you pay full price for the stock of a large, high-quality company, you're likely, at best, to earn a similar return as the S&P 500."

Based on this IBM case study, I would add to that: "And at worst, you'll do much worse than the market."

But the final lesson is unchanged:

The key to investment success is to wait patiently until the market makes a mistake and you can buy the stock of a quality company at a bargain price.

You need to be patient and wait for a scenario like when the stock of one of the world's best businesses, Meta Platforms (META), crashed by more than 75% from its highs in mid-2021 to the end of October 2022.

It was a gift that I was happy to share with my readers, pounding the table on it when it traded below $100 per share in a six-part series beginning on November 1, 2022 (in my September 9 e-mail this year, I summarized what Meta's financials looked like back then).

I've continued to be bullish on it ever since, and on Monday it closed at an all-time high of $564.41 per share...

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.

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