The long road back
Despite heady gains, it will be a long time before investors see Nasdaq 5000 again
A big stumbling block for the Nasdaq is that it is capitalization weighted, meaning big stocks have more sway on the index's movements. Yet the biggest blue chip tech stocks in the Nasdaq have not recovered nearly as fast as its smaller Internet names. Some haven't recovered at all.
Microsoft, the biggest and most influential name in the Nasdaq, has lost 4. 3 percent a year over the past three years. Intel, another megatech stock, has slumped 13.7 percent a year. By comparison, eBay is up nearly 50 percent a year for the past three years while Amazon.com is up 53.6 percent annually. And Google has been soaring since its initial public stock offering. The disparity in the performance of megacap and smaller tech may continue. While earnings for blue chip tech companies in the S&P 500 index are expected to rise 14 percent in the first quarter of 2005 and 11 percent in the second quarter, earnings among smaller tech companies in the S&P 600 index of small stocks are expected to grow 20 percent and 28 percent, respectively.
Though tech stocks have been beaten down for several years now, there is still some evidence that the mania that propped them up in the late 1990s isn't quite over. Tech sector earnings are expected to be only average in the coming years, yet investors continue to reward tech stocks with rich valuations.
Overvalued? Consider this: Tech stocks in the S&P 500 command a price-earnings ratio of 26.2, based on 2004 operating earnings, according to S&P. That's the richest P/E ratio for any sector in the economy. By comparison, the S&P's overall P/E ratio stands at just 17.9. "Old habits die hard," says Payden & Rygel's Orndorff.
While many former day-traders, having learned their lesson, may now be happy plowing $10,000 into their homes rather than Internet stocks, "there is still a segment of retail investors who are willing to chase performance," says Baron iOpportunity's Rubin. "But the average lawyer or doctor or dentist putting all their net worth into stocks like Theglobe.com--that era is over."
Moreover, it's overly simplistic to say that tech has been an abject failure for investors. "If you look at a chart of the Nasdaq, it looks like tech is done for--that tech has fallen and can't get up," says Kevin Landis, chief investment officer for the tech-oriented Firsthand Funds. "But if you look at other measures, you'll see the success of tech."
Landis points out companies like eBay and Amazon.com that have lived up to their promise of revolutionizing retail through online selling. And while the cellphone business has been riddled with problems in the past few years, cellphone use and sales continue to flourish.
Like previous manias, the big lesson of the bursting of the Nasdaq bubble has been this: Investing ideas come and go, but very few companies can successfully capitalize on even the best ideas for the long run. Just as the development of railroads and radios and cars once proved revolutionary, only a handful of companies survived to lead each of those industries.
The same thing is occurring with the Internet. The challenge, then, isn't waiting for another Nasdaq 5000 but finding tech stocks that are likely to set new highs.
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