When you think of the Nasdaq, what comes to mind? An index of speculative tech companies that soared to dizzying heights in the late 1990s — and still hasn’t fully recovered? Or a diversified benchmark of mature businesses that has trounced the S&P 500 and the Dow over the past decade?
With the Nasdaq in striking distance of 5000 for the first time since March 2000there’s growing talk about how the index looks nothing like it did in the bubble years. How sure are you, though, of the “this time things are different” arguments?
ARGUMENT NO. 1: This is not the same tech-loaded index it was.
The reality: In March 2000, tech accounted for half the Nasdaq’s stock market value, and the top five holdings were Cisco CISCO SYSTEMS INC.
, Microsoft MICROSOFT CORP.
, Intel INTEL CORPORATION
, Qualcomm QUALCOMM INC.
, and Oracle ORACLE CORPORATION
Now tech is 45% of the index, and the top five stocks are Apple APPLE INC.
, Google ALPHABET INC.
, Microsoft MICROSOFT CORP.
, Amazon.com AMAZON.COM INC.
, and Facebook FACEBOOK INC.
. This mirrors the broad market, where tech is no longer a third of the S&P 500 à la 2000 but is still the biggest sector.
The takeaway: Own an S&P 500 fund, and you don’t need a tech-centric one. Already, $1 out of every $5 you have invested is in technology stocks, which is plenty.
ARGUMENT NO. 2: The biggest tech stocks, such as Microsoft and Intel, have matured.
The reality: True, but over the past 5½ years blue-chip tech has gone from trading at a 10% discount to the S&P to a 5% premium. The bigger problem lies beyond the largest players.
“Unlike 2000, where the large-caps were insanely overvalued, today what you’re seeing is the smaller-cap names are the most expensive,” says Ben Inker, co-head of asset allocation at GMO.
(up 282% in 2013) and drugmaker Incyte INCYTE CORPORATION
(up 205%). The index now trades at a price/earnings ratio of more than 170.
Meanwhile, many of last year’s hottest social media stocks, such as Groupon GROUPON INC.
, Zynga ZYNGA INC
, and Zillow ZILLOW GROUP INC
, are still profitless.
The takeaway: Don’t load up on blue-chip tech, and take profits in biotech and social media stocks.
ARGUMENT NO. 3: Nasdaq’s P/E is a fraction of what it was in 2000, so you can’t call it frothy anymore.
The reality: Compared with a P/E of 175 in 2000, today’s Nasdaq looks “reasonably” priced at around 30 times earnings. But it’s foolish to make relative judgments against such historically extreme cases, says Greg Schultz, a principal with Asset Allocation Advisors.
The takeaway: Don’t touch this index — it trades as an ETF FIDELITY COMMWLTH NASDAQ COMPOSITE INDEX TRAC
— until prices fall. Buy cheap, as the Nasdaq was in the early 1990s, and you do well.
“Pay too much,” says Schultz, “and you get bad returns. It’s as simple as that.”