As the Nasdaq 100 closes in on its all-time high, the one recorded way back in the bad old days of 2000, you are hearing a lot of talk of dread about "here we go again," and "when will we ever learn." You know the logic: If we are going back to those egregious levels we have to be on thin ice, because stocks were ridiculously over-inflated then so they must, once again, be ridiculously overvalued now. Shouldn't we be selling like mad now, as we approach that historically dreaded high, so history doesn't repeat itself and we give back much of what we have made? Once irrational, always irrational?
Funny thing, though, like so many other attempts to stoke fear -- remember the March 2014 cloud selloff that was supposed to mimic the dive of 2000? -- a close look at the Nasdaq Composite Index when it was hitting those records in 2000 makes you feel more confident, not less, that we deserve to trade higher. That's right: A look at each component at the time shows a market that was certainly overvalued, but not in the way so many uninformed people try to remember it.
Let me give you an aggregate view that might open eyes or jog memories, and then I will drill down to some of the members that led us higher back then to show you why I feel more emboldened, not less, that the comparisons are fatuous and reflect a lack of critical thinking.
First, if you had bought the 100 members of that index at the time and simply held on to each one, you would be up, in some cases up appreciably, on 26 of those stocks. Another 16 stocks got takeover bids at a premium to where they traded at the top.
OK, I know -- taken together, those outright winners trading today, and those that were taken over at a premium, amount to less than half of the list. But urban legend would have you recalling that you got your head handed to you on pretty much everything you bought at those levels. Not true.
Sure, there's time value of money. You got hurt on that. And, of course, it isn't enough just to be profitable. You could have held on to a lot of other stocks not in the comp and done far better. Many of the "winners" have, indeed, underperformed the S&P 500 dating back to the same period. Still, though, it just wasn't the calamity that we seem to remember it as. Trust me: The pessimist's mind is playing tricks.
Now you might say, hey, all those 26 winners prove is that we have 26 stocks that are equally as overvalued now as they were when the Nasdaq Comp stocks was back at the peak in 2000.
But, if we examine the stocks individually, we see that almost every single one of these stocks that's above its price from back then makes sense to me, and very few seem outsized or glaring in their valuations. The winners aren't outrageous on their faces, glaring like they were back then. They aren't scary.
In fact, the only Comp stock that's truly overvalued on earnings now that may have been equally as expensive back then? Oh, you guessed it ¿ Amazon (AMZN). It was unprofitably worth $24 billion in 2000, as the 28th largest stock in the Comp, and it is unprofitably worth $150 billion now. The rest of the so-called expensive stocks in the Comp now seem downright tame vs. the valuation of almost any stock back then.
The anomaly these days, at least when it comes to size, the one stock that's really pushing the Comp up in 2014, is, of course, Apple (AAPL) at $674 billion in market capitalization. Not only is that a bigger cap than anything in 2000, but it just dwarves anything else in the Comp now and is almost twice the value of Google (GOOGL) and Microsoft (MSFT), neither of which approaches the size of the biggest stocks of the index of yore. It's the sorest thumb, and if you take it out of the Comp I think you will find that 2014's version seems quant versus the outsized levels of the old days.
But Apple's market capitalization, as colossal as it is, must be viewed only as a function of its price-to-earnings multiple. Apples to apples still rules in 2014. Using a $9 earnings-per-share number for next year, to which the Apple consensus is gravitating, puts the stock at just about 12.5x earnings. That's cheap, almost 6 multiple points below the average stock in the S&P 500. But Apple has fabulous growth characteristics, gigantic stock buybacks and large dividends, so the only thing unreasonable about Apple isn't its market capitalization. It's valuation.
Compare Apple's price-to-earnings ratio now to the 80x and 90x multiples to earnings that prevailed among most of the leaders back then -- that is, if there were earnings. Apple skews everything when it comes to this version of the Comp, both in the price of the average itself and in the average multiple at which the Comp trades. Skews it toward the cheap, not the expensive, unlike the leaders back them.
Plus, Apple's had an unbelievably humongous move from the top of 2000, when it was valued at $22 billion, and was the 31st biggest stock in the comp -- until now, when it is almost $300 billion larger than the runner-ups. That, again, seems intellectually daunting. But what are you supposed to do? Penalize Apple's superior characteristics somehow? Asterisk it? Deem that it can't trade at more than 10x earnings? You have to pay something for Apple's earnings stream, don't you? This one's anything but outrageous, even as it seems ridiculous on the face of it.
No matter what, if you back out Apple, just remove it from the Comp entirely, I think you would find the capitalizations for the rest of the stocks totally and eminently reasonable vs. year 2000, especially when you consider the value they have created and the cash flow they currently generate.
I will go one step further. I think you would, when you compare the components overall to the prices of the components in year 2000, find yourself wondering how come stocks are so cheaply valued now vs. then despite the robust nature of the outlook vs. what ultimately occurred, economically, in 2001. Sure, Europe and Asia are in descent right now, but there's no denying that the backdrop now of incredibly low interest rates and gross domestic product (GDP) growth, at least in the U.S., could warrant dramatically higher valuations.
Now, let's consider the losers for a moment -- the stocks that, if you had held on to them, you would be down since the top in 2000. Twenty-seven stocks are still below their highs of those days, and here, again, I think you would be pleasantly assured by that fact because it speaks to the notion that things are very much within reason now vs. in the bad old days. I write that especially because many of the companies are most improved since the last time around and, most likely, deserve higher valuations.
Why was the market so wrong at the time about these 27 losers? First, back then we were fascinated with telco and telecom and viewed the companies that transported voice, pictures and data and made it hum through the system as being among the best bets for long-term value. That's why Cisco (CSCO), which is currently valued at $140 billion could trade at $551 billion back then, the most heavily valued stock in the Comp.
The contrast with the $674 billion current capitalization of Apple is pretty instructive, because Cisco was trading at about 80x EPS back then. Cisco was -- and still is -- considered the backbone of the Internet. We thought the backbone, however, would have the best growth prospects of all companies, because Cisco played the role of the arms merchant to all of the telecommunications companies that were exploiting the World Wide Web. How could it lose? How about if it turns out that its clients, as we will see in a moment, weren't good companies, or worse, were outright failures or even frauds. The customer breakdown, not the Cisco management, led to the rise and fall of this long-term winner.
We also believed that the personal computer was never to be challenged as an instrument of communications or ease. It was in total ascendance in 2000, slaying not just big hardware but all other firms that offered storage and processing. Back then we had no idea that one day our handhelds were going to be more powerful and useful than our personal computers. Instead we were still being blown away about how our personal computers could access the Web seamlessly on top of all of the other things they could do.
That's why Microsoft was valued at $541 billion vs. today's $359 billion capitalization. I think that's a totally honest discount vs. the level back then, given the miscues the Steve Ballmer-led Microsoft has made with respect to Internet search, interactivity social and mobile. It just missed too much to fulfill that yesteryear capitalization's promise. Same with Intel (INTC), which clocked in at $476 billion vs. today's $186 billion market capitalization. The microprocessor company dominated the PC. But the PC turned out not to dominate the future of computing or communications as it seemed it would back then. The company couldn't adjust and the valuation fell by the wayside.
Now, I know Google and Facebook (FB) didn't exist in those days, but even now their valuations at $357 billion and $213 billion, respectively, are very reasonable on a P/E basis vs. the Big Three -- Cisco, Microsoft and Intel -- back in 2000. Social, mobile and interactivity turned out to be the future, and these companies have it.
Twenty-two of the Comp members from back then succumbed to disappointing takeovers that will have forever locked in a loss. That includes Sun Micro, which traded at $183 billion back then, but sold to Oracle (ORCL) for $7.4 billion in 2010. It also includes Dell, valued at $148 billion, but which went private at $24 billion last year. The professionals and the dot-coms loved the speed of the Sun microprocessors back then. You found hundreds of them working overtime in the big Internet providers back then. The public viewed Dell as the Wal-Mart (WMT) of the personal-computer companies.
Both visions proved to be unjustified as rich bets. Sun couldn't transition to a world where components came down so much in price that regular old Intel-based processors in plain white boxes could exceed Sun's speed and power. Dell had to deal with the commoditization of personal computers through mass market channels and Amazon. No matter how hard Michael Dell and his team tried to be special and different Dell, the company just never got special and different enough. That said, just as Dell stock was too rich back in 2000, it was definitely too cheap when it went private in 2013. I predict a bright future for the no-doubt-once-again-to-be-public Dell.
Now, how about the nine stocks that just plain disappeared, that went bankrupt from the Comp? I think that these stocks, unfortunately, define what we remember the Comp to be, not only because they were disastrous, but they were disastrous so quickly. The flame-outs still seem extraordinary, perhaps the worst in history, and they are indelibly left in our memory.
Let me tick down each one so you know what I mean. First is MCIWorldcom. The company was valued at $122 billion at the peak, the seventh biggest member of the Comp. Less than two years later it was zero. Same with the $36 billion Global Crossing and the $20 billion Metromedia Fiber, as well as the $14 billion McLoedUSA and the $9 billion Nextlink and $5.4 billion Adelphia Communications. All zeroes. These disasters and the $31 billion CMGI, an Internet "incubator" that disappeared quickly, pretty much color how we remember the Comp. Who can blame anyone for thinking about the Comp's hideous peak in terms of these obliterations because the speed with which they disappeared was breathtaking.
Plus, the potential long-term success of all of these companies was crucial to the market capitalization of big daddy Cisco. You take those companies' growth plans away, you take away a big reason to value Cisco as the first stock worth more than $500 billion. They were all huge clients or potentially huge clients of the networking king.
I would also be remiss if I didn't discuss the stretched-to-ridiculous-valuations of click-to-talk pioneer Nextel at $54 billion, and fiber magnate Level Three (LVLT) at $41 billion. The former almost crushed Sprint (S), which got a "bargain" buying Nextel for $36 billion four years later. We know that almost 100% write-off could go down as the worst acquisition in modern history. Incredibly, Level Three made it through that period and the subsequent years alive, and trades at $16 billion, but it spent an awful lot of time in the wilderness. It made it because of Netflix (NFLX) and the need, years after it was built, for a pipe to deliver fast video at home.
Now let's go back to the winners in the Comp -- the ones you would be profitable from if you stayed long them. First is Qualcomm (QCOM), which went from $105 billion then to $122 billion now. After the crash in 2000, Qualcomm was often reviled as if it were like the losers I just detailed because it had moved up so far, so fast. In retrospect, I think the valuation makes the most sense of all of these winning survivors, because Qualcomm understood the world was going to go mobile. The stock traded too far ahead of the eventual earnings explosion, but the direction turned out to be dead right. No remorse there.
Amgen's (AMGN) next of the big-caps back that that have succeeded in besting that not-so-hallowed price. It's gone from $82 billion to $128 billion as its franchise has grown from the focus of just anemia to a host of drugs that have become mainstays of every hospital around the world.
Then there's Comcast (CMCSA), the 18th-largest back then at $33 billion, and now valued at $122 billion. Given that it's gone from a smaller regional player to the national powerhouse of cable, that doesn't seem like much of a stretch. Neither does Ericsson (ERIC), which has gone from $32 billion to $40 billion even as it dominates in European telecommunications equipment. Nor does eBay (EBAY), which has doubled in size, justifiably because of PayPal, or Costco (COST), which has gone from $23 billion in market cap to $62 billion while it has basically taken the club category all to itself, save the underperforming Sam's Club. All, in retrospect, were simply excellent buys at the top of the market.
The other winners read like a who's who of what's popular right now: Dish (DISH), Adobe (ADBE), Paychex (PAYX) Biogen Idec (BIIB), Starbucks (SBUX), Electronic Arts (EA), Fiserv (FISV), Bed Bath (BBBY), Paccar (PCAR), Synopsis (SNPS), Dollar Tree (DLTR), Intuit (INTU) and Cintas (CTAS). If you had taken a long-term view, you would have much more than made the money back.
Surprisingly, you know where you would have done very well? In some of the companies on the list that got giant bids soon after the top. SDLI, the 45th largest company in the Comp, at $15 billion, got a $41 billion bid from none other than JDS Uniphase (JDSU) not long after -- although, boy, did you ever have to lock in that gain from that all stock deal!
VoiceStream, a $12 billion company at the top of the index, had a promising telco business, so promising that Deutsche Telekom paid $50 billion for it. Hence why we have T-Mobile (TMUS). AstraZeneca (AZN), Virgin Media (VMED) and Vivendi (VIV) also paid big bucks to go American with Medimmune, NTLI and USANetworks. Sanofi (SNY) also rewarded your patience with a terrific bid for Genzyme. And let's not forget the instant gratification that shareholders of internet provider Lycos got with its $12.5 acquisition by Spanish buyer Terra Networks in a deal that even then astounded us for its sheer stupidity as Lycos was already falling by the wayside. We forget how foreign buying supported the index at the top.
There were plenty of other extremely profitable bids if you held on from the top including, Pacificare, Northwest Air, Concord, Quintiles, Peoplesoft, Molex and McAfee. They all gave you good gains. Oracle, which has shed about $70 billion since the top when it was the number four largest stock in the Comp, snapped up Peoplesoft, Seibel and SunMicro. Two out of three ain't bad.
Now, there are plenty of companies in the $20-billion-to-$10-billion market-cap area back then that are roughly a half to one-third of those levels now. I don't regard that, though, as bad news for the current version of these companies. I say it is a reminder that the smaller players in the Comp these days aren't that expensive at all. And the fact is that many of these companies were simply semiconductor concerns that also had huge telco and storage businesses that weren't ready for the collapse of their customer base just described.
Many on the list back then were, to be fair, simply too expensive relative to their prospects, and I could argue are too cheap now relative to their futures if things go right, including Applied Materials (AMAT), or RF Micro (RFMD), or Ciena (CIEN) or Maxim (MXIM) or Altera (ALTR) and Xilinx (XLNX) and KLA-Tencor (KLAC).
It's a rare one that's just hanging on like a RealNetworks (RNWK), which traded at $11 billion and is now at $252 million or a BroadVision (BVSN), which was at $16 billion and is now at a feckless $29 million. It was far more often that when companies dropped down hard they got scooped up at big discounts, like with Immunex or Seibel or Panamsat, or Chiron, BMC Software, American Power Conversion or Novell. All of these seem like the reasonable fate of companies that falter, and not much else.
Why bother to go as detailed as I am doing down this distant memory lane? (And believe me, I have stats on another couple dozen companies that I am not going to put you through now.) Because the main lesson of 2000 wasn't that everything was overvalued or stupid or nuts. It was that a couple of very-large-capitalization Internet- and personal-computer-company stocks got totally out of hand at the exact same time that that the build out of the World Wide Web was occurring. The crash of the telecoms and the evisceration of the personal-computer base in the face of what turned out to be the iPhone just couldn't be foreseen by many.
Oh yeah, sure, history does repeat itself. But this particular history seems to be repeating itself only to the superficial -- those who haven't put boots on the ground to see what really happened and what's really happening.
I hope after reading this you feel at least at tad immunized about the tripwire of the Nasdaq Comp in March of 2000. If you are still scared, what can I say, I just can't help.