A New Stock Market Index: NYC Taxi Medallions

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Instead of using the S&P 500 (SPX) or Dow Jones Industrial Average (DJI) I'm proposing a new index to measure the performance of stocks against. This will raise the investment bar a bit.

Jonas Goldberg recently wrote a column about New York City taxi medallions, basically the license that allows someone to operate a cab in the Big Apple. He estimated that they have increased in "value" by 2,000% since 1980. That's an annualized rate of about 10%. The S&P 500 has gained 754% or about 6.9% per year and the Dow Jones increased about 987% (7.7% per year) over the past 32 years. A license will now set you back a whopping sum of $704,000. The cost of a medallion has also outpaced the U.S. house price index and gold over the period.

How can you beat the "medallion index?"

A combination of growth and dividend orientated companies probably will get you there. Over the last three decades a portfolio containing the following stocks (with an equally weighted cost basis) was able to beat the index (as well as the S&P 500 and the Dow). Based upon my analysis the performance should continue over the long-term, after some short-term headwinds are overcome. 

 

Ticker

Total Return (%)

Annual Return (%)

AAPL

6170 (*)

13.8 (*)

UTX

1820

9.7

JNJ

1440

8.9

MCD

1340

8.7

PG

1210

8.4

Average

2396

10.6

Medallion

2000

10.0

DJI

987

7.7

SP500

754

6.9

 (*) Since IPO (12/12/1980). All others since 12/6/1980

Without one high performer, the return would have lagged slightly. Apple (NASDAQ: AAPL), the tech giant, sells personal computers, the iPod, the iPhone, and the iPad and is the world's most valuable company by market cap. The company is currently worth more than $500 billion and generated $156 billion in revenues; it had a diluted EPS of $44.15 during the last fiscal year.

Over the last few months the company has refreshed its entire product lineup in time for the Christmas shopping season and is poised for another excellent quarter according to many analysts. Over 50 million iPhones and 25 iPads are expected to be sold. This should drive EPS growth into the mid-20% range, slower than in the past but still solid by any standard. Therefore my guess is Apple will keep outperforming the medallion index. 

United Technologies Corp. (NYSE: UTX) has been a member of the Dow since the 1930's. The conglomerate's primary businesses are in the aerospace and building systems industries. Some of its iconic products include Pratt & Whitney jet engines, Otis elevators, Carrier air conditioners and the Hamilton Sundstrand space suit.

Like many defense contractors UTC may be impacted if the federal budget sequestration takes effect in 2013 which could hurt sales to the US DoD. The company's just completed acquisition of Goodrich Corp. will increase growth in the commercial aerospace sector and offset any potential military cuts. A challenge for UTC is to reduce the debt it has taken on this year because of the Goodrich deal. So far it has managed to pay down $2 billion in loans. I would say that performance will be about the same as it has been over the long term. 

Johnson and Johnson (NYSE: JNJ), another Dow stock, is a member of the Dividend Aristocrats which are businesses that have increased its payout every year for 25 years or more (the company has actually done it for 56 straight years). The current yield is 3.48% making it an attractive alternative to fixed-income investments.

The consumer products and pharmaceutical company, based in New Brunswick, NJ, has a market cap of $194 billion and annual revenues of over $65 billion. While EPS and free cash flow growth are slowing a bit now, analysts who follow the company expect these rates to pick up again in the future. Several recent acquisitions and introduction of new products should contribute to higher earnings. The stock is near its all-time high.

I'm lovin' the overall results of McDonald's Corp. (NYSE: MCD) over the long term. The fast food restaurant with such products as the Big Mac and the Quarter Pounder is also a Dividend Aristocrat and one of the 30 Dow stocks. McDonald's has an $88.4 billion market cap and about $27 billion in annual revenue. 

In an effort to revitalize lagging worldwide sales and earnings the company recently revised its ad campaign which will now emphasize its dollar menu over the higher priced extra value meals. As soon as general economic activity picks up as expected it is likely Mickey D's will get its mojo back.

Procter and Gamble (NYSE: PG) is another member of the Dow and a Dividend Aristocrat (see the trend here?). The manufacturer of Tide laundry detergent, Pampers and Gillette razors seems to have had the right formula over the long term.

On the earnings front it has stumbled somewhat this year with a 20% decline in year-over-year EPS growth. Activist investor Bill Ackman has pressed for changes to be made by management to address the downturn. CEO Robert McDonald is under a high level of scrutiny to deal with the issues. 

The company has gone though similar rough patches in the past and seemed to get through them with only minor damage. The stock is up 4.5% YTD in spite of the turmoil. Adding in the dividend results in a tidy 7.7% total return, just slightly below its historical performance. Consensus estimates call for improved earnings growth over the next year which should drive the stock price even higher. I'd bet that the company continues to perform as it has over the past. 

 So instead of comparing your performance against the S&P500 or the Dow I issue a challenge to measure it against a new index, the NYC taxi medallion. It should be a more interesting battle.

 

 


Mathman6577 owns shares of Apple, United Technologies, Johnson & Johnson, The Procter & Gamble Company, and McDonald's. The Motley Fool owns shares of Apple, Johnson & Johnson, and McDonald's. Motley Fool newsletter services recommend Apple, Johnson & Johnson, McDonald's, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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