Market forces are not always rational. Sometimes, a company continues to grow its earnings but its stock price gets stuck in a rut, trading within the same price range for several years. Earnings continue to grow but the price stays about the same. This phenomenon can be observed in the graph in Section 1 of the stock selection guide and also in the table in Section 3 (falling high and low PEs). Sooner or later, the market will “discover” the stock and the price will quickly adjust upward and then follow earnings more closely. Patient investors are rewarded. This is the coiled spring effect.
Three quality stocks that fall into this category are Wal-Mart Stores (WMT), Microsoft (MSFT) and the Coca-Cola Company (KO). They are discussed below. Moose Pond currently holds Wal-Mart.