Any time we zoom, any time stocks take a real leap, we have to wonder if we have come too far too fast. It's a reasonable assumption, especially on a day like today.
You know I think stocks are going up because earnings are much better than expected and the alternatives -- bonds, gold and real estate -- seem very expensive compared to owning stocks, especially stocks of companies flush with cash with good dividends and excellent growth prospects.
Still, I never mind assessing the stock market's valuation whether we're talking about the Dow, the S&P 500 or the Nasdaq.
That's why I want to tackle head on the notion of the Nasdaq being overvalued, something we heard a lot about today because the index blasted through the 6000 level, and when we crash through round numbers it's a cause for instant soul searching.
Of course, when you discuss the Nasdaq, it's almost always within the confines of another time the Nasdaq went on a furious jaunt, none other than the turn of the century when it took out the 5000 level before unceremoniously and ignominiously diving thousands of points and wiping out a whole generation of investors.
Could that happen again?
I am not going to dodge the conversation. But I am going to say that when you look at the two sets of stocks, you discover something rather quickly. Most of the companies that took us to Nasdaq 5000 back then turned out to be either incredibly overvalued on an earnings basis or were plain old worthless.
The best way to compare stocks, the way we know is consistent with historical norms, is to match the future price to earnings multiples of the stock leaders in the indices then and now.
But consider this: At the time Microsoft traded at 59x earnings, Cisco at 179x earnings, Intel at 126x earnings and Oracle at 87x earnings.
Fortunately, it's pretty easy to make a head-to-head comparison because these companies -- unlike so many others in the index back then -- still exist. Microsoft trades at 20x earnings, Intel at 17x earnings, Cisco at 13x earnings and Oracle is at 16x earnings.
When you consider that the average stock in the S&P 500 sells at 21x earnings, not only are these stocks ridiculously undervalued versus their prices back then, they are actually cheaper than the average stock in the S&P 500.
Now, if you go back in time, you would discover that 2000 turned out to be the height of when the personal computer and the internet were converging to create a whole new world where we were all supposed to be on the verge of playing games, buying goods and watching television on the web.
Turns out we were a decade early. When it didn't pan out and when almost all the companies that were being formed to take advantage of the web subsequently crashed, the infrastructure crashed with it, including all of those market leaders.
These days, these four are considered value stocks. They all buy back stock. They all pay good dividends. They are all much cheaper than any consumer packaged-goods company or major industrial that I follow.
Ironically, if you go down two more places back in 2000, you will discover the only company that was really cheap on earnings, Worldcom, which looked to be selling at around 20x its future earnings.
But it turns out there were no earnings. Worldcom was a fraud, a story that my colleague David Faber broke on CNBC.
It is really easy to see why some people would worry about valuation because there are a couple of companies that truly appear to have 2000-like valuations that, indeed, have been market leaders, namely Amazon (AMZN) and Netflix (NFLX) .
Ironically, Amazon right here at this moment trades at almost the exact same forward multiple on earnings that Intel traded at back then. The online retailer, the fourth-largest company on the Nasdaq, reports on Thursday and I don't think you will get an earnings number that will somehow make the stock seem cheap on any metric.
The stock of Netflix trades at a multiple that is right between what Cisco and Intel traded at, even more expensive than Amazon.
So aren't those doomed to crash? Mustn't history repeat itself?
I am not so sure.
This market has allowed a pass to be given to Amazon and Netflix. These are not valued by traditional metrics. Because they aren't, they are always suspect. I know even though I like them very much, I wouldn't own them for my charitable trust because I can't find a way to justify how they are priced other than off sales momentum and sign-ups.
Amazon has the greatest sales momentum of all time. I have never seen a company this large grow so fast in a market that is worth trillions upon trillions of dollars worldwide. The fact is that is so compelling to some growth investors that they are simply willing to waive any of the standards, as they were in Nasdaq 2000. But there's a big difference. Amazon has massive cash flow. Unlike back in 2000, this company makes billions of dollars. It just chooses to keep spending so it can grow even faster.
Netflix? What can I say? This is a stock that's about opportunity. It's easy to see that somehow, on a day like today, when it just cracked into the Chinese market, that it should be up eight bucks. What happens if a third of the country takes Netflix, which is pretty much the penetration that Netflix has in the United States. You would instantly triple the enrollment!
I do not expect that to happen. But, again, like with Amazon, there are plenty of money managers who think like that and will be drawn to the stock because of that possibility.
Now we've covered Microsoft, Amazon, Intel and Cisco and I threw in Netflix to show you the most overvalued of the overvalued. Let's round out the rest of the top 10. First there is Apple (AAPL) , which even after its historic run trades at just 14x next year's earnings. Remember, again, Apple's not only cheap on earnings but it has a big dividend, large cash hoard and monster buyback, something none of those top 10 had back 17 years ago.
How about No. 2, Alphabet GOOGL? I know that this stock, which used to be the G in FANG -- the acronym I came up with for fast growers Facebook (FB) , Amazon, Netflix and Google -- seems like it is expensive. But do you know that it sells at only 18x next year's earnings, cheaper than the average stock, with a huge cash hoard overseas and a very large buyback. Get this, you are probably sick of hearing about how expensive Facebook is, until you actually look at the numbers: It is selling at just 21x next year's numbers. The same price as the average stock, for heaven's sakes. Comcast (CMCSA) , parent company of CNBC, is next and weighs in at 17x next year's numbers with a large dividend and a solid buyback. Finally, there's Amgen (AMGN) and Kraft Heinz (KHC) , which are at 12x and 22x earnings. (Cisco, Apple, Facebook and Comcast are part of TheStreet's Action Alerts PLUS portfolio.)
Yep, the most expensive stock away from Amazon in the top 10 is a food stock! You worried about that one?
Now, I know you can say wait a second, all of these stocks could still prove to be wildly overvalued if the world turns upside down. But I could counter by saying, wait, if Donald Trump gets his way on repatriation and on much lower corporate taxes -- he wants 15% -- then these stocks are so cheap that you should be buying them hand over fist.
So my conclusion? Even though the Nasdaq 100 is up 14% year to date, I refuse to call it overvalued versus not only 2000 but many other eras that I have to admit seemed a lot less risky. Does that mean you should just go buy anything you want?
No, I think it means you should stay the course and if we manage to have a retreat, yes, indeed, I do think you should do some buying.