Sunday, February 22, 2015 4:19:20 AM
To Nasdaq 5000 and Beyond
The dot-com era Nasdaq was a product of dreams. Now, strong profits drive its rise. When the index finally tops 5000 again, it’s likely to stay.
By Alexander Eule
February 21, 2015
Looking back, it seems like a mirage. For a few days in March 2000, the Nasdaq Composite hovered above 5000. That same week, as Barron’s chronicled, Procter & Gamble (ticker: PG) tumbled 39%. The Dow Jones Industrial Average, meanwhile, was down 14% on the year, against the Nasdaq’s 24% gain. The New Economy was making its mark.
Until it wasn’t. The Nasdaq held 5000 for barely 48 hours before crashing 80% in the next 31 months.
P&G recovered its losses in two years. The Nasdaq is still trying, though it seems to be a matter of days now. The high-tech index closed last week at 4956, just 1% from 5000 and 2% from its all-time closing high of 5049.
This time, the 5000 level could stick. “What was propelling the Nasdaq in the year 2000 was a dream. What’s driving the Nasdaq today is reality,” says Gavin Baker, who runs the Nasdaq-focused Fidelity OTC Portfolio fund (FOCPX). “The current valuation is very well supported by earnings and cash flows and if those earnings and cash flows continue growing, the Nasdaq should continue going up.”
Patience and fundamentals have been force-fed on Nasdaq investors. The nearly 3,900-point recovery has taken 12 years. In the 1990s, the Nasdaq had managed the same 350% gain in just three. The dot-com rally, of course, was powered by wildly inflated multiples. In March 2000, the Nasdaq traded at well over 100 times earnings. Today, the Nasdaq has a price/earnings multiple of 21, a few ticks above the Standard & Poor’s 500, at 17.5.
“You had a lot of very immature companies that didn’t have real business models. They were entirely depending on the capital markets for funding,” says Baker, originally a tech analyst who has run Fidelity’s OTC fund since 2009. The OTC name is a throwback to the fund’s 1984 inception, when the Nasdaq was colloquially known as the over-the-counter market. Today, Fidelity OTC is one of just a handful of mutual funds that benchmarks against the Nasdaq. That gives Baker a unique view of the index. “In a lot of ways the reality that we are living in is more incredible than the dream that was driving the Nasdaq” 15 years ago, he says.
But that hasn’t stopped P/Es from tumbling to Earth. “That’s what the story is,” Baker adds. “The earnings of the Nasdaq have grown significantly. The P/E has dramatically compressed.” Valued at 2000’s P/E level, today’s Nasdaq would be priced somewhere around 30,000, Baker notes.
It’s worth pointing out that, in real terms, Nasdaq investors are still waiting to be made whole. Despite a relatively modest inflation rate of 2.2% over the last 15 years, Nasdaq 5000 is actually Nasdaq 7000.
Only Microsoft (MSFT) and Intel (INTC) were on the index’s Top 10 list 15 years ago and remain there today. Oracle (ORCL), with a market value of $192 billion, would rank No. 5, but it changed its listing to the New York Stock Exchange in 2013.
EVEN NASDAQ 7000 is not impossible in the coming years. The index is now a mature group; the largest contributors to the index carry reasonable P/Es (see table). Earnings alone could drive the Nasdaq up 18% in the coming year, if analysts’ estimates are correct. According to FactSet, combined earnings for the index are forecast to be $235 per share in 2015, up from last year’s $199.
The Nasdaq’s performance, meanwhile, is now backstopped by the world’s largest company. Apple (AAPL) makes up 10% of the index. At just 14.7 times earnings estimates for the next 12 months, Apple shares could easily head higher, as Barron’s points out in “Apple Shares Could Return 25% in a Year.”
There are still bubble-type stocks, of course. Fifteen years after the crash, investors continue to pay up for Amazon.com (AMZN), even though it struggles to turn a profit. SolarCity (SCTY), a solar-panel installer, is up 579% since its December 2012 initial public offering and now fetches a market value of $5.2 billion. The company has never produced an annual profit and is likely to lose $531 million this year.
Still, if the dot-com edition of Nasdaq 5000 left a legacy, it’s a more discriminating class of technology investors, at least in the public arena. Underwriters know better than to come to market with a half-baked idea. Last year, just 53 technology companies came public, according to University of Florida professor Jay Ritter, compared with 371 in 1999 and 261 in 2000. It’s a different Nasdaq. Soon 5000 could be just another number.
E-mail: editors@barrons.com
The dot-com era Nasdaq was a product of dreams. Now, strong profits drive its rise. When the index finally tops 5000 again, it’s likely to stay.
By Alexander Eule
February 21, 2015
Looking back, it seems like a mirage. For a few days in March 2000, the Nasdaq Composite hovered above 5000. That same week, as Barron’s chronicled, Procter & Gamble (ticker: PG) tumbled 39%. The Dow Jones Industrial Average, meanwhile, was down 14% on the year, against the Nasdaq’s 24% gain. The New Economy was making its mark.
Until it wasn’t. The Nasdaq held 5000 for barely 48 hours before crashing 80% in the next 31 months.
P&G recovered its losses in two years. The Nasdaq is still trying, though it seems to be a matter of days now. The high-tech index closed last week at 4956, just 1% from 5000 and 2% from its all-time closing high of 5049.
This time, the 5000 level could stick. “What was propelling the Nasdaq in the year 2000 was a dream. What’s driving the Nasdaq today is reality,” says Gavin Baker, who runs the Nasdaq-focused Fidelity OTC Portfolio fund (FOCPX). “The current valuation is very well supported by earnings and cash flows and if those earnings and cash flows continue growing, the Nasdaq should continue going up.”
Patience and fundamentals have been force-fed on Nasdaq investors. The nearly 3,900-point recovery has taken 12 years. In the 1990s, the Nasdaq had managed the same 350% gain in just three. The dot-com rally, of course, was powered by wildly inflated multiples. In March 2000, the Nasdaq traded at well over 100 times earnings. Today, the Nasdaq has a price/earnings multiple of 21, a few ticks above the Standard & Poor’s 500, at 17.5.
“You had a lot of very immature companies that didn’t have real business models. They were entirely depending on the capital markets for funding,” says Baker, originally a tech analyst who has run Fidelity’s OTC fund since 2009. The OTC name is a throwback to the fund’s 1984 inception, when the Nasdaq was colloquially known as the over-the-counter market. Today, Fidelity OTC is one of just a handful of mutual funds that benchmarks against the Nasdaq. That gives Baker a unique view of the index. “In a lot of ways the reality that we are living in is more incredible than the dream that was driving the Nasdaq” 15 years ago, he says.
But that hasn’t stopped P/Es from tumbling to Earth. “That’s what the story is,” Baker adds. “The earnings of the Nasdaq have grown significantly. The P/E has dramatically compressed.” Valued at 2000’s P/E level, today’s Nasdaq would be priced somewhere around 30,000, Baker notes.
It’s worth pointing out that, in real terms, Nasdaq investors are still waiting to be made whole. Despite a relatively modest inflation rate of 2.2% over the last 15 years, Nasdaq 5000 is actually Nasdaq 7000.
Only Microsoft (MSFT) and Intel (INTC) were on the index’s Top 10 list 15 years ago and remain there today. Oracle (ORCL), with a market value of $192 billion, would rank No. 5, but it changed its listing to the New York Stock Exchange in 2013.
EVEN NASDAQ 7000 is not impossible in the coming years. The index is now a mature group; the largest contributors to the index carry reasonable P/Es (see table). Earnings alone could drive the Nasdaq up 18% in the coming year, if analysts’ estimates are correct. According to FactSet, combined earnings for the index are forecast to be $235 per share in 2015, up from last year’s $199.
The Nasdaq’s performance, meanwhile, is now backstopped by the world’s largest company. Apple (AAPL) makes up 10% of the index. At just 14.7 times earnings estimates for the next 12 months, Apple shares could easily head higher, as Barron’s points out in “Apple Shares Could Return 25% in a Year.”
There are still bubble-type stocks, of course. Fifteen years after the crash, investors continue to pay up for Amazon.com (AMZN), even though it struggles to turn a profit. SolarCity (SCTY), a solar-panel installer, is up 579% since its December 2012 initial public offering and now fetches a market value of $5.2 billion. The company has never produced an annual profit and is likely to lose $531 million this year.
Still, if the dot-com edition of Nasdaq 5000 left a legacy, it’s a more discriminating class of technology investors, at least in the public arena. Underwriters know better than to come to market with a half-baked idea. Last year, just 53 technology companies came public, according to University of Florida professor Jay Ritter, compared with 371 in 1999 and 261 in 2000. It’s a different Nasdaq. Soon 5000 could be just another number.
E-mail: editors@barrons.com
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