Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
The WSJ has an interesting look at NASDAQ 3,000 this time around versus the first pass through some dozen years ago. For those of you around at the time, that era is one likely never to be replicated … but let’s not put anything in the realm of impossible with the way central bankers now act. Anyhow, this is a good refresher for those who experienced NASDAQ 3K in the past, and will probably be a bit eye opening for people newer to the market. Man, it was good to be a ‘genius’ back in those days…
- It has been more than 12 years since the Nasdaq Composite Index made its first climb above 3000, an eon in stock-market terms. Now, the Nasdaq is once again poised to cross that psychologically important marker. This time, though, the technology-heavy stock index, like many of the traders who tracked it back then, is an older, wiser and arguably frumpier version of its former self.
- In November 1999, the technology world was ablaze with an investment frenzy that favored unprofitable, unproven companies that were valued for their potential “clicks” and “eyeballs.” Now, the biggest 100 Nasdaq-listed companies look a lot more like their more sedate counterparts on the Dow Jones Industrial Average. They sit on mounds of cash. Almost half of them pay dividends. They raise money in the bond market, carrying, in aggregate, 10 times the amount of debt they did in 1999. And their price-to-earnings ratios are, well, average.
- Few dare to say the Nasdaq is in position to challenge its all-time high; the index peaked at 5048.62 on March 10, 2000, almost exactly 12 years ago, before falling back below 3000 in December of that year.
- But investors believe tech stocks still have further to climb. They point to the growing U.S. economy as a key support for tech stocks. Moreover, many tech companies used the recent recession to trim costs, leaving them with leaner operations. Most important, tech stocks now trade at much more grounded valuations that reflect the maturity of many Nasdaq companies. The Nasdaq Composite now trades at about 23 times the previous year’s earnings, compared with 78 times trailing earnings in November 1999, according to stock-market research firm Birinyi Associates.
- To be sure, some argue there are signs of exuberance in certain pockets of the tech sector. For some, the excitement that surrounded initial public offerings by the likes of social-media newcomers Zynga Inc.and Groupon Inc., and anticipation for Facebook Inc.’s public debut, are reminiscent of the late 1990s exuberance. And, even though 12 years ago may feel like an eternity, many investors still remember the pain of the tech bubble’s spectacular burst.
- Six of the Nasdaq’s top 10 companies in 1999, including Microsoft and Cisco Systems, are still at the top of the list today, though their share prices have been battered. Meanwhile, Apple, Googleand Amazon.com have elbowed their way into the top 10.
- Some 43 of the top 100 Nasdaq stocks, including Microsoft and Cisco, now pay a dividend. In November 1999, when the Nasdaq first burst through 3000, the tally was just nine.
- Cisco….at $19.80, its stock has a trailing dividend yield of about 1.2% and trades at around one-quarter of its peak level of $80.06 in March of 2000. Its valuation—about 15.5 times trailing earnings, according to FactSet—is but a fraction of the 100 times earnings that it fetched at the height of the bubble.
- Microsoft shares, meanwhile, trade at about half their record highs during the bubble, but the company earns twice as much money and now pays a dividend.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
