Inverted Nifty Fifty

abnormalreturns
May 23rd, 2007

Nearly every day visitors come to this site searching for the phrase “inverted Nifty Fifty.” I have to imagine they come away disappointed. It is curious to us because we never remember writing the phrase. Back when this blog started we had a post that included in it the phrases: “Nifty Fifty” and “inverted yield curve.” In it we discussed the undervaluation of large cap stocks relative to small caps and the effect of an inverted yield curve on the markets. But never together.

Indeed it was Christopher Davis of Davis Advisors in an interview with Dyan Machan at Smartmoney.com who coined the phrase.

With the market’s biggest names trading at historical lows, “it’s like an inverted Nifty Fifty,” Davis says, referring to the early 1970s, when the biggest names traded at sky-high prices. Paraphrasing a lesson he learned from his father, he adds, “Once every 10 years or so, you can buy the stalwarts.”

Since nearly day one of this blog it has seemed that large cap stocks have been trading at a discount to their small cap cousins. The challenge for fundamental investors is to identify a catalyst that will change the way the market views the relative valuation of an asset.

In the case of large cap stocks it has been the surge in private equity that has led to the relative outperformance of large cap stocks. Nearly a year ago we identified the ability of private equity to purchase companies that had once been too large to take private as a catalyst.

Veteran investors realize that companies (and markets) can stay over/undervalued for quite some time. It often takes a catalyst to nudge them back to “fair value.” Private equity has had a meaningful impact on the markets of late, including the megacaps.

We did not coin the phrase “inverted Nifty Fifty” but we did discuss the role of “megacap catalysts.” Sorry for the confusion every one. Nevertheless we do hope you find something of interest here at Abnormal Returns.