Nasdaq 2002 & Nasdaq Today: Apples and Oranges!
Tuesday, November 25th, 2014
I've been hearing talk about the Nasdaq approaching all-time highs. The peak was in March 2000, when the index hit 5,400. By 2002, the Nasdaq had fallen below 1,500; today it is about 4,700, roughly 15 percent from hitting all-time highs again.
I was curious about what the top 10 Nasdaq companies were at its peak and whether they are still in the top 10 today. If not, where are they?
When I looked at the data, none of the top 10 performing stocks of 2002 is in today's top 10 index.
Some of the companies performed rather well, such as OSI Pharmaceuticals. No. 10 on the list was Quest Diagnostics (Nasdaq: DGX), which was still up 365 percent for the 14-year period - not a bad return, but not as good as OSI Pharmaceuticals' 900 percent return.
Today the top 10 performing Nasdaq stocks include Green Brick Partners Inc. (Nasdaq: GRBK), RadNet Inc. (Nasdaq: RDNT) and Receptos Inc. (Nasdaq: RCPT).
What concerns me is that investors will look at current levels of the Nasdaq and assume that all stocks are overpriced. It is important for investors to realize that these are not the same companies that made up the index 14 years ago.
Apple Inc. (Nasdaq: AAPL) is the largest-weighted component of the Nasdaq today and accounts for 12.5 percent of the value of the index. Compare that with the year 2000, when Microsoft Corp. (Nasdaq: MSFT) had a top holding of 10.75 percent.
Today, Apple's revenues are seven times those of Microsoft's into 2000.
What investors pay for the earnings and the sales of a company are important. Apple now trades at 14 times the price to earnings. Compare that to Microsoft in 2000 trading at 67 times the price to earnings.
Another important valuation is price to sales. Today Apple Computer trades at three times sales. Compare that with Microsoft trading at 29 times sales in 2000.
If you notice, Microsoft traded at twice the price to earnings, compared with the price to sales of Apple, a good example of how expensive the Nasdaq was in 2000.
Another example of how irrational the Nasdaq and stocks in general were in 2000 is Intel Corp.'s (Nasdaq: INTC) market capitalization of $372 billion.
In 2000, when the bubble burst, Intel stock fell 80 percent in six months. When it reached its bottom, Intel still traded at 20 times the price earnings, which is higher than today's Microsoft price-to-earnings ratio.
Today Intel trades with a PE of 17.1 and a forward PE of 14.5.
The current weight of Nasdaq's top 10 companies account for 50 percent of the total index of these companies, which includes Apple, Microsoft, Google (Nasdaq: GOOG) class A, Amazon.com (Nasdaq: AMZN), Intel, Qualcomm Inc. (Nasdaq: QCOM),Cisco Systems Inc. (Nasdaq: CSCO), Gilead Sciences Inc. (Nasdaq: GILD),Comcast Corp. (Nasdaq: CMCSA) class A and Facebook (Nasdaq: FB) class A stock.
Of these 10 companies that account for half of the index, only Facebook, which has a current PE of 68, and Amazon, which has no price earnings because it has no earnings, could be considered overpriced based on valuation ratios.
The other eight companies have valuation ratios that are reasonable or a good value.
While some investors are concerned about an overpriced market because the market has climbed dramatically since 2009, it is important for investors to look back at the 1998 to 2000 comparison of the Nasdaq.
In this bubble of 20 months, the Nasdaq skyrocketed 180 percent.
Many of the companies in this index, as well as the S&P 500 and the Dow Jones Industrial Average, have seen both their sales and earnings climb at a rate that matches the increase of the stock price - not to mention the far stronger balance sheets that on average have less debt and more cash, overall just far stronger companies at better values.
I always encourage you to look at the fundamentals of the company that you're investing in and not listen to the hype or comparisons to the Nasdaq bubble in 2000.
Today's companies have very strong balance sheets, good earnings growth and cash flow.
However, be cautious. Don't assume that all companies have strong balance sheets, growing earnings and cash flow. Do your research before investing your hard-earned dollars.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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