In November 1992, Food Lion, the grocery store chain, became the subject of a national media investigation regarding unsanitary practices and labor law violations. An ABC News report accused the company of selling outdated food, cheese gnawed by rats, and spoiled meat washed in bleach to kill the odor.
In the days prior to and following the television broadcast, the price of Food Lion’s stock plummeted — the company lost $1.5 billion in market capitalization in five days of trading. For the month of November, the company reported that its sales fell 9.5% and its stock price dropped 20%.
As Food Lion was being hammered by all of the negative media attention, members of the Durham, North Carolina-based Ujamaa Investment Club watched with interest. The 13-member club, which had just established itself in February 1992 with contributions of $50 per month, had made its first investments in companies that included McDonald’s, AFLAC, and Food Lion. But by keeping abreast of the situation, Ujamaa was able to unload the stock before its plummeting value could negatively impact the club’s portfolio. Within 18 months, Food Lion sales dropped $4.6 billion, costing the company an estimated $233 million in profits.
“When you’re investing, you’re not supposed to let short-term changes in the market cause you to react,” says Bertha Jones, the club’s financial partner and co-founder who works as director of client services at North Carolina Central University. “But in this particular case, it was more than just a fluctuation — it was widespread.”
Watching as media events greatly affected the performance of a stock helped the club develop sound stock analysis, evaluation and tracking practices, and strict operating procedures and policies. Each partner was assigned stocks to research, track, and report on monthly, while a rotating committee was charged with providing quarterly portfolio reviews and annual audits.
The club established a philosophy of investing in growth companies with a proven track record. The goal was to outperform Standard & Poor’s 500. Club members made a point of using the collective knowledge of its partners, many of whom work in the technology sector with companies such as IBM and Glaxo. Their industry insight about new product development coupled with stock selection guides and ratings, forecasting, and comparative data helped the club make sound investment decisions.
Between 1994 and 2000, the club’s portfolio grew at an average rate of 30%. Companies such as AFLAC, Microsoft, Intel, and Cisco became staples within the club’s portfolio. Then, as the stock market declined from 2000 through 2002, the club’s portfolio dropped 51.9% because more than 70% of its holdings were in hard-hit technology stocks such as Intel, Microsoft, and Nortel. “We dropped in value, but we weren’t wiped out,” says Jones.
Ujamaa reduced its holdings in over-represented industries; sold weaker-performing stocks; and diversified into the restaurant, retail, medical services, and education sectors. The adjustments helped the club weather the recession and a decline in membership from 13 to eight. By the third quarter of 2005, Ujamaa’s portfolio was worth $169,000, with a 13.78% compounded rate