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Economy has a way of felling stock market Goliaths

Steve Leuthold
Courtesy of the Leuthold Group
Steve Leuthold

What about that great stock you just want to hang onto forever? Forget it.

That’s the principal takeaway from Steve Leuthold’s latest study, on creative destruction.

Leuthold is the Minneapolis investment guru widely regarded for his mastery of securities market cycles. While the rest of us habitually focus on day-to-day gyrations in the stock market, Leuthold rivets on the long-term. Decades. Sometimes centuries.

He titles his new analysis “Are Google & Cisco Forever?” Absolutely not, he told a University of Minnesota audience last week.

“It is a mistake,” he warns, “to assume that the great companies of today will continue being the great companies of tomorrow.”

Economist Joseph Schumpeter advanced the idea of creative destruction, the turbulent process of replacing outmoded work with up-to-date jobs, a couple of generations ago. This constant churning keeps the economy vibrant. That’s a big plus overall. It’s also great if you’re on the creative end, but not so great if your job gets destroyed.

Leuthold and sidekick Andy Engel ranked the 100 largest U.S. companies by market value — shares outstanding times the stock price — at intervals going back to 1960. Only 11 of this year’s top 100 were on the list in 1960. Just 36 remain from the 1990 list. 3M, which ranked 12th in 1960, was 49th this year.

“I was surprised,” Leuthold says of the intensity of the churning.

Market value information was lacking before 1960, so Leuthold used assets to track changes back to 1917.

Only your great-grandfather knew about most of those 1917 companies. Ever hear of 1917’s 11th largest, International Mercantile Marine? It was the corporate parent of the Titanic.

No. 63 Cuba Cane Sugar met its demise after Fidel Castro privatized it.

Pullman, 26th in 1917, made sleeper cars. Demand waned as passenger train service withered.

Leuthold says the turbulence has been accelerating, thanks to rapidly changing technology and more acquisitions.

And the churning is worldwide. Leuthold distributed a recent column, by New York Times financial columnist Floyd Norris, to show how quickly the global rankings of the world’s 20 most valuable corporate titans have been changing.

Japan had 14 of the 20 juggernauts of 1989, none in 2007. The United States had 14 of the top 20 in 1999, seven in 2007. China, unrepresented on both earlier lists, had eight this year.

Could the rising turbulence affect the Twin Cities’ strong base of corporate headquarters? You betcha. So far, high-value newcomers like UnitedHealth, Medtronic and Best Buy have pretty much replaced big-hitters that have been acquired or flamed out. But Leuthold’s new study carries an unstated red flag for this region: Given all the tumult, we can’t count on retaining that headquarters base indefinitely.

What led Steve Leuthold to do this particular analysis? Years ago, his brother-in-law inherited a gob of money. The estate went into a trust, which contained just one stock. The rules said the stock couldn’t be sold.

“They said you couldn’t go wrong with that one,” Leuthold jokes. The stock was the Penn Central Railroad.

Comments (2)

  1. Submitted by Stephen Gross on 11/12/2007 - 04:51 pm.

    A few questions & thoughts:

    (1) In the study you cite, does it take into account name changes of corporations over time?

    (2) In the study you cite, does it take into account buyouts? (A company could grow in market cap simply by buying others, which doesn’t necessarily reflect changing influence or a changing market).

    (3) In my studies of urban economies, I’ve seen two reliable predictors of long-term economic health:

    (a) Overall economic diversity; coupled with

    (b) Significant market presence / dominance in one or two sectors.

    Care to comment on whether (a) and (b) are relevant in the Twin Cities?

  2. Submitted by dave beal on 11/13/2007 - 11:04 pm.

    Yes, the study takes name changes into account. And it includes buyouts — I doubt there’d be any way to screen them out over such long periods. The Twin Cities is probably one of the best places to study the impact of creative destruction, because it is the home to an unusually large gob of publicly held companies. That means lots of data exists to track their survival. And this record and other data suggest that your predictors have worked out well for the Twin Cities over the years. This is a diverse area economically. At the same time it has shown strength in fields such as computer hardware (60s to mid-80s) and med-tech (80s to date). The churning in these and other industries here has done much to keep the economy here vibrant.

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