Tuesday, March 3, 2015

Then vs Now

We apologize in advance for offering our commentary on the Nasdaq's already too much discussed revisit of the 5,000 level for the first time since 2000.  While it finally happened yesterday, pundits had been highlighting the milestone's proximity for the past several weeks.  Nasdaq 5,000 represents a lot of things but first and foremost it conjures up memories of the wild excesses of the late 90's tech bubble.

According to Yahoo Finance contributor, Brian Lund, the Nasdaq rose 774% in the 90's.  And while that by itself is a spectacular rise, certain individual stocks had runs that were simply obscene:

Dell went up 91,863%.
EMC went up 83,456%.
AOL went up 70,626%

"To illustrate just how sick those number are, if you dropped five grand into Dell computers on the last trading day of 1989, and then took a ten-year nap, you would have woken up with an account worth $4.5 million dollars."

Yesterday's Financial Times ran a helpful comparison of today's Nasdaq at 5,000 versus the index hitting that level in 2000.  A lot has changed in 15 years.  One of the biggest differences is the valuations of the top 10 stocks in the index.  Today's valuations are much more in line with historical norms which gives the market, in our eyes, a far better chance of continuing higher versus the extremely overvalued levels of the dot-com era.

While speculation is a constant presence in any market, it's when it turns excessive that boom and bust cycles occur.  You're likely to find a stock or sector showing extremes on any given day but the chart below shows just how different the Nasdaq is now.  You could make a case that certain biotechs and perhaps Private Equity (Uber?) are showing similarities to the 90's dot-com bubbly characteristics but that argument is for another day. 

Top 10 stocks in the Nasdaq, then and now
 2000  2015
 Company  PE ratio  Company  PE ratio
Microsoft 57 Apple 15
Cisco 127 Google 19
Intel 43 Microsoft 16
Oracle 103 Facebook 39
Sun Micro 85 Amazon
Dell 57 Intel 14
MCI WorldCom 22 Gilead 11
Chartered Semi 53 Cisco 13
Qualcomm 123 Comcast 17
Yahoo! 418 Amgen 17
Source: Factset; Bloomberg; Barrons; BTIG LLC

The current trailing price to earnings ratio for the Nasdaq stands at 22 times. Meanwhile, its p/e peaked at an insane 72 times during dot-com fever and stood at 64 times when the benchmark previously visited 5,000.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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