Happy 10th Anniversary, Nasdaq 5,000… Will We See You Again by 2020?
by Gary Spivak, Investment U Research Team
Wednesday, March 24, 2010
What does a bubble feel like?
Chances are, if you have more than three gray hairs and have owned a house in the last decade, you’ve lived through two of them.
When you’re three years old, or you’re positioned perfectly in the middle of a stock market bubble, they can be euphoric.
But they don’t end well. And if you don’t get out in time, it can be disastrous.
So how can you tell when you’re in the bubble? And how do you get out in time?
The Attitude That Sent the Nasdaq to 5,000
In the late 1990s, I was researching software stocks. I recall having the following conversation with a very intelligent institutional client.
G.S: You have to buy this stock. The company is reporting quarterly earnings next week and will exceed revenue and EPS estimates again – just as it has for the last six quarters. The stock is going up!
Client: Are you crazy? This stock is trading at 20 times next year’s SALES! Not earnings… SALES! It will never be able to justify that valuation.
G.S: Forget what you know about valuation. It doesn’t matter anymore. This is the 1990s and it is the Internet age. When they beat estimates, the stock will go up.
Client: Yeah, I guess you’re right. Put me down for another 100,000 shares.
And that sentiment is how the Nasdaq exchange hit 5,000 points in March 2000.
As for the company, it reported better than expected revenue and earnings. The stock continued to rise. However, that was before the bubble burst and the stock tanked by more than 90% over the following two years.
So will the Nasdaq ever reach 5,000 again?
The Nasdaq Will Hit 5,000 Again… But It Won’t Happen Anytime Soon
The short answer is: Yes.
But it’s unlikely to do so in the next couple of years. The Dow Jones Industrial Average will hit 15,000 before the Nasdaq hits 5,000.
Consider this: In March 1999, the Nasdaq stood at virtually the same level it does today (around 2,400).
So what happened? Three factors…
- Suspension of Disbelief: Although investors had seen bubbles before, they convinced themselves that somehow, this time it was different.
- Strong Economic Growth: The late 1990s/early 2000s were legitimate boom times. The economy was performing well and the Internet was adding extreme value.
- Unsustainable Valuations: People were willing to pay anything for a stock on the assumption that it would still go up.
So yes… the Nasdaq will hit 5,000 again. But even if it grows at an average of 10% per year (an aggressive estimate), it won’t break 5,000 until 2019. And it will take a generation before investors buy into that type of hype again.
However, that doesn’t mean technology represents a bad investment…
The Trigger That Will Spark a New Tech Rally
Although it freaks out many investors, what we’re seeing today is merely a return to a “normal” environment.
Just as we were in an “overbought” environment 10 years ago, we were “oversold” one year ago when the Nasdaq sunk below 1,300.
With many companies having cut back on their spending, a return to normal spending seems likely as confidence returns. Even a return to above normal project spending is very possible.
Technology firms stand to benefit from this trend, as corporations invest in technology upgrades.
But what about investors?
Technology Stocks: Still a Good Investment
Market sentiment is important. And at the moment, both Main Street and Wall Street remain concerned about the overall picture, rather than any return to bubblicious times. We’ve barely stepped away from the precipice (the “anti-bubble,” so to speak). And that’s good for technology stocks.
Investors will make money with technology stocks in today’s environment. When corporations are emerging from a constrained environment, they will refocus on those postponed projects – especially those involving technology.
As for which companies in particular, we still like the leaders – Cisco (Nasdaq: CSCO), Oracle (Nasdaq: ORCL) and IBM (NYSE: IBM) – sound business models addressing real business needs.
These companies won’t re-invent capitalism, but they’re well-established and about as solid as you can get. Invest wisely and you should make money in this sector.
Good investing,
Gary Spivak
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