IE 11 is not supported. For an optimal experience visit our site on another browser.

Nasdaq anniversary has sobering lessons

It has been five years since the Nasdaq Composite index, a gauge of the broad technology sector, hit its all-time peak of 5,048.62. But don’t expect the anniversary to raise much merriment on Wall Street.
/ Source:

It has been five years since the Nasdaq Composite index, a gauge of the broad technology sector, hit its all-time peak of 5,048.62. But don’t expect the anniversary to raise much merriment on Wall Street.

Over the last five years, countless high-tech companies have folded, erasing jobs and shareholder capital. The technology index is down 60 percent from the heady heights it saw in 2000. And analysts say some of the pain in the technology sector may be yet to come.

Although they have moderated significantly, stock valuations in the technology sector remain high says Steve Massocca, head of trading for Pacific Growth Equities in San Francisco who focuses on technology investing. That’s making investors unwilling to invest in the sector, he said.

“People think technology stocks are overpriced in relation to their potential growth rate,” Massocca said. “Of course, they’ve been correcting themselves, but they haven’t quite got there yet. So I think technology will continue to be one of the lagging stock sectors because people still think the multiples in the sector are out of whack.”

Another reason for the lack of excitement about technology stocks is that, unlike the late 1990s and early 2000 when the Internet was the latest thing, today there is a lack of any new, exciting technologies coming to market Massocca added. The best that technology investors can do is look for “diamonds in the rough,” he said.

“You have to look for the companies that have excellent growth prospects, say of 25, 30 or 40 percent,” he said. “Even if they’ve been taken to the woodshed with all the other technology names, the bottom line is you can buy these stocks now at a decent multiple.”

Peter Cardillo, chief market analyst and strategist for S.W. Bach, a New York retail brokerage, is more sanguine about the outlook for the technology sector. He says that, as long as the economy continues to grow at a decent pace and it translates into capital investment, spending by companies on information technology is likely to continue, and that is good news for the high-tech sector.

But in the short-term, Cardillo says that high crude oil prices, the weaker U.S. dollar and a rise in long-term interest rates, which suggests the economy is gathering a head of steam, could weigh on technology stocks and the broader market. “The fear is how aggressive the Fed will be,” he said. “Will they have to apply the brakes and cut short economic activity?”

Dot-com dizziness
On March 10, 2000, it seemed that the Nasdaq Composite index and the dot-com boom that propelled the stock market barometer up some 800 percent from 1990 to 2000 could only surge onward. Nothing could have been further from the truth.

The index fell all the way to 1,114.11 on Oct. 9, 2002, before turning higher. Now, five years on, with an unrealistic high-tech dream destroyed and American business returned to a more sensible way of working, a still decimated Nasdaq Composite has no hopes of reclaiming its former heights anytime soon.

“Everybody got one hell of an education after the Nasdaq hit its high and the bubble burst,” said Lincoln Anderson, chief investment officer at LPL Financial Services. “It turned out that you really did need a sustainable business model that didn’t rely on untenable assumptions. It seems so basic now, but back then, who knew?”

While the Nasdaq Stock Market lists only about a quarter of the publicly traded companies in the United States, it took on disproportionate importance in the late 1990s.

Some of the biggest initial public offerings in history — many of which ended up discarded, bought or dismantled — were done on the Nasdaq. Dot-coms with huge ambitions and no profits took investors’ capital freely, despite a lack of revenues, let alone actual profits — then ultimately folded and left shareholders stuck with the bill.

With those kinds of false business models rightly discredited, the stocks listed on the Nasdaq today are leaner and far more viable. But by the same token, the wild spate of innovation and job growth that fueled the boom disappeared along with investors’ money.

Proof of the changed atmosphere rests with two other major market measures — the Dow Jones industrial average is carefully treading back toward 11,000, down from its own peak of 11,722.98, reached Jan. 14, 2000, and the Standard & Poor’s 500 index is down over 20 percent from its all-time high of 1,527.46, reached March 24, 2000.

Corporate conservatism
The lagging Nasdaq isn’t the only sign that the dot-com era is gone. Compare the March 2005 issue of Fast Company magazine, one of the earliest “New Economy” business magazines, with an issue from October 2000. The 2005 issue has 96 pages. The 2000 issue weighed in at 406.

The time of expensive offices with $800 Aeron chairs and skyscraper views — for start-ups without profits even — has also passed. Big spenders are frowned upon. Look at Inc. — employees, including founder Jeff Bezos, worked at desks made of doors and two-by-fours. Companies that were careful with their money survived. Others did not.

It wasn’t that the ideas were wrong. Some companies simply failed to execute a sound business plan. Others piled into a crowded arena and failed to set themselves apart from the crowd. And still others were simply overly ambitious, failing to account for the fact that the Internet boom would ultimately have to settle down.

“The vision was there, but the people involved in the whole dot-com bubble based so much of their businesses on assumptions that couldn’t last,” said Joseph Battipaglia, chief investment officer at Ryan Beck & Co. “There was a chance that those assumptions — that the Internet would continue to grow and businesses would continue to spend on technology at those high levels — could have gone on a while. But they didn’t.”

Corporate America learned its lesson from the high-tech bubble. Sky-high promises have been replaced with ultra-conservatism when it comes to predicting profits — which has led to many companies deliberately lowering their profit expectations in order to then beat those expectations when earnings time rolls around.

And companies are also cautious about hiring and innovation, preferring to squeeze the last trickles of efficiency out of current operations rather than expanding through innovation and hiring new workers. As a result, there are fewer new jobs, slow capital spending for new equipment — and stock prices on the Nasdaq that remain in the cellar.