The 20th century saw rise to almost all of the great companies in the world today. In fact, the majority of the companies that we now consider to be world leaders did not exist at the outset of the century. Only one of the companies currently listed on the Dow Jones Industrial Average, General Electric (NYSE: GE), was also on the list in 1901. All of the others have been added in the interim.
And that's appropriate, for the American economy has transformed from being dependent on heavy industry and manufacturing, through the periods of development of mass communications, transportation and construction, through two enormous war efforts, the computer age, and finally the advent of globalization and the Internet. The world has endured more change in this last century than in the previous five centuries combined.
Whereas in 1900 it was an all day trip to travel from San Francisco to Oakland, now it is possible to wake up in North Dakota and go to sleep in South Africa in a single day. Whereas long-distance communications was once only available to the chosen few, now billions of dollars and trillions of bits fly effortlessly around the world every day, without heed of borders, oceans, or natural barriers. Local brands and shops have been replaced by multinational brands and chains, to the point that Coca-Cola (NYSE: KO) is as much at home in Yemen as it is in Idaho, and more people have heard of Nokia (NYSE: NOK) than have heard of Finland, its country of origin.
The companies that make up the components of the NOW 50 are in the vanguard of the trends that will define commerce in the next decades. They possess a gold-plated brand name, a tradition of innovation, a superior use of technology, and a culture of accountability to their shareholders. They also, as a group, represent the globalization of the American economy. The NOW 50 contains 8 companies that are domiciled outside of the United States and an additional 19 that are American companies that derive more than 50% of their income from international operations. As the economies of the world continue to meld into one, we expect that more and more this index will reflect the composite nature of the global marketplace.
When we announced the names of the companies that would be included in the list, we received a significant amount of feedback from Fools asking about the process of inclusion, the valuation methodology, and the review for replacement. In regard to the valuation, we offer an additional article that contains all of the required information. For the other issues, we can address them here.
Process of Inclusion: The NOW 50 trustees received more than 2000 nominations via e-mail and on the NOW 50 Message Board with a total of 288 companies being nominated. We worked on a rolling analysis basis, so that we could eliminate those companies that had been nominated but were most demonstrably lacking in meeting the criteria for inclusion on their own individual merits. This process was repeated until we had completed a list of approximately 70 companies. From this list the Trustees held a series of open forum debates followed by closed ballot voting. This continued until each company had either been included as one of the 50 or eliminated.
Of the companies that are not included in the final list, the last ones eliminated were Gateway (NYSE: GTW), First Data Corporation (NYSE: FDC), Corning (NYSE: GLW), Disney (NYSE: DIS), eBay (Nasdaq: EBAY), JDS Uniphase (Nasdaq: JDSU), Nortel Networks (NYSE: NT), SAP (NYSE: SAP), Vodaphone (NYSE: VOD), Qualcomm (Nasdaq: QCOM), Southwest Airlines (NYSE: LUV), and Bristol Myers (NYSE: BMY). All of these companies are quite spectacular, and are likely to be solid long-term investments. They also are among those that are most likely to replace one of the existing NOW 50 companies should such an action be deemed necessary in the future.
Survivorship Bias/Review: The NOW is designed with the intention of being an index, not a portfolio. In doing so, we have placed a fairly stringent limitation on our own ability to replace stocks. Still, the S&P 500 has made 49 replacements in the last 5 years, and recently the Dow Jones Industrials waved good-bye to 4 laggards and replaced them with more representative companies. So, we do expect there to be some transitory nature to the stocks that are included.
Our review period will be annual, commencing on the Foolish holiday of April 1 each year. In this period the Trustees will review the companies included and identify any that have ceased to meet the criteria, or that have been surpassed by more relevant companies outside of the NOW 50. In the majority of cases we will "flag" companies that are lacking and review them again the following year. In certain cases we will move to replace a company immediately if circumstances strongly indicate it is no longer a leader in its field and it does not show any sign of recovery. We'll call this the Iomega Exception. Should two companies in the Index merge, or should one merge with a company outside of the index as the acquired company, a review will be made immediately and if need be a replacement component company will be named, with recalculations being done at that time.
Corporate Actions: As explained in the valuation article, the NOW 50 is a market cap weighted index. We've done this to remove some of the difficulties that arise from corporate actions such as mergers, spin-offs, stock splits, and dividends. Each company is assigned a weight in the index based upon its market capitalization. This weight will be recalculated each quarter on March 15, June 15, August 15, and December 15. The current values are based upon the market caps for each company as of December 15, 1999. If a company has a spin-off, it will have a smaller market cap and thus be recalculated lower at the next recalculation, just as it would increase through a merger. Dividends will be ignored for the purpose of calculation of gains for the index.
As always, we welcome your feedback on the NOW 50 Index, either on the message board or by email at now@fool.com. Starting today you will see the NOW 50 included in several places on fool.com so that you may begin to track your portfolio performance against it. We will be rolling out additional features in the months to come, and will begin periodical features on the included companies.
Finally, we have produced a brief description of each component company in the NOW 50. I hope you will be inspired to learn more about these companies and to try to find those gems out there that will help you "Beat the NOW 50" with your own portfolio.
Enjoy!
-Bill Mann
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