By E.S. Browning
Technology stocks propelled the Nasdaq Composite Index to a
record, 15 years after it soared to its last peak on the backs of
young Silicon Valley companies--before plunging when dot-com mania
evaporated.
While today's Nasdaq still houses plenty of tech highfliers, it
looks far less speculative than it did in 2000, and many of its
most prominent companies have matured into global behemoths
grounded in real products, sales and profits.
On Thursday the index, propelled by hopes for an improving U.S.
economy and Federal Reserve restraint in raising interest rates,
rose 20.89 points, or 0.4%, to 5056.06, outrunning the high of
5048.62 set on March 10, 2000.
Many investors doubted they would see a Nasdaq record again in
their lifetimes, after the index tumbled 78%.
Now they have, and while the Nasdaq--which reflects the value of
the companies traded on the Nasdaq Stock Market--remains volatile,
analysts see far less risk.
"Back then, the mentality was that it was a new era," said James
Paulsen, chief investment strategist at Wells Capital Management,
which oversees $347 billion. He aggressively warned clients in 1999
that stocks were overpriced. "That is a more dangerous environment
than the mind-set we have today,"
Still, Nasdaq stocks once again look pricey to him, especially
biotechnology stocks, and he has urged clients to shift some money
to less expensive small stocks and foreign markets.
But the overall U.S. stock market looks far less risky, he said,
than it did during the latter stages of the tech boom.
Nasdaq's most prominent companies have flourished. Apple Inc.
and Google Inc. have become global giants. Microsoft Corp., Oracle
Corp. and Cisco Systems Inc. all pay dividends, which they didn't
in the 1990s. Apple, which had last paid a dividend in 1995,
resumed doing so in 2012.
On Thursday, the Dow Jones Industrial Average rose 20.42 points,
or 0.1%, to 18058.69, while the S&P 500 advanced 4.97 points,
or 0.2%, to 2112.93. The Dow and the S&P 500, which didn't fall
nearly as hard as the Nasdaq in the 2000-2002 selloff, had returned
to record territory before the 2008 financial crisis and have hit
many more records since 2013.
The Nasdaq has taken much longer because its prices in 2000 were
wildly inflated, the result of euphoria over the then-new
Internet's seemingly limitless prospects.
In the past six years, the Nasdaq has nearly quadrupled. That is
a rapid rise, but the index covered the same ground in less than
half the time from 1997 through early 2000.
The Nasdaq today still is home to young biotechnology, Internet
and social-media companies that many consider overpriced. It is
subject to sharp swings when worries spread about global growth or
high stock prices, which has happened in recent weeks.
But most of its big companies trade on real profits and sales,
rather than the clicks, eyeballs and wild hopes that skewed
analysts' views of stock values 15 years ago. That has helped the
Nasdaq rebound from recent reversals.
This week's stock gains--the Nasdaq has risen 2.5% in the past
four days--mark a rebound after fears about Greece's debt and an
overheated Chinese stock market knocked shares down this month.
Investors again hope economies and markets world-wide will benefit
from stimulus measures by central banks in Europe, Japan and other
foreign countries. Moreover, some think that weak U.S.
first-quarter growth and soft corporate earnings might make the Fed
wait until at least September to raise rates in the U.S. Over time,
higher rates tend to slow economic growth, which could hit stock
prices.
In 1999 and 2000, the Fed made sharp interest-rate increases
aimed at cooling the economy. Today, the Fed still is trying to
boost growth, not slow it.
In 2000, the Nasdaq traded at 175 times its companies' profits
for the previous 12 months, according to Birinyi Associates. Today,
it is 30 times, which is high but not astronomical.
Wells Capital Management's Mr. Paulsen said he wouldn't be
surprised to see a 15% pullback in the broad stock market and a 25%
decline in the Nasdaq. But "for me, any decline here would be more
of a correction than an end to the bull market," he said.
"The Nasdaq is a world away" from what it was in 2000, said
Daniel Morris, global investment strategist at TIAA-CREF Asset
Management, which oversees $866 billion. "The key difference
between then and now is the valuations."
The dot-com era's most egregious excesses centered on companies
with weak business models such as the retail website Pets.com and
the social media site theGlobe.com. TheGlobe rose more than 600%
above its offer price on its first day of trading in 1998, but
retrenched after the 2000 stock collapse and ceased almost all
operations in 2008. Pets.com, which featured a still-famous sock
puppet of a dog in its ads, didn't figure out how to sell goods at
a profit and closed in 2000.
Apple and Microsoft, the largest and third-largest Nasdaq stocks
by market value, trade at 17 times profits for the past 12 months,
about average for large U.S. stocks. Google, the second largest, is
at 27 times earnings, above average but not grotesquely. Intel
Corp., the seventh-biggest Nasdaq stock, is at 13.5 times earnings,
below average.
To be sure, not all valuation questions have gone away. Facebook
Inc., the fourth-largest Nasdaq company, trades at 74 times
earnings, which will prove justified only if the company continues
its rapid growth.
Like Mr. Paulsen, Mr. Morris said stocks in general are
expensive enough that he wouldn't be surprised to see a market
pullback, especially with investors nervous about the Fed's
interest-rate plans. But he said that most tech stocks have strong
enough businesses that he expects them to rebound strongly and
finish the year with gains.
Write to E.S. Browning at jim.browning@wsj.com
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