Don't look now, but the Nasdaq Composite index, which is
dominated by technology stocks, recently set a 14-year high,
closing March 5 at 4358. But it's the only major U.S. stock index
that hasn't established a new record this year. Which makes me
wonder: Have investors learned the lessons of the tech bubble too
well? Plenty of tech stocks look attractive to me at current
levels, and the tech sector is likely to grow robustly in the
coming years. But the tech crash early this century was so terrible
that many investors still won't touch these stocks.
It's important not to forget how we got here. Everyone knows how
crazy investors acted in the late 1990s and early 2000. Many tech
stocks traded at triple-digit price-earnings ratios and
double-digit price-to-sales ratios. Many Internet start-ups with
high-flying stocks had no profits and sometimes no revenues. They
were priced based on the number of people who visited their Web
Tech mania was in its fullest flower by the time the Nasdaq
index peaked at 5049, on March 10, 2000. The rest, as they say, is
Owners of tech shares suffered a two-year battering, during
which the Nasdaq Composite plunged 78% before bottoming at 1114 on
October 9, 2002. By contrast, Standard & Poor's 500-stock index
lost 47% during the 2000-02 bear market. The damage to tech
investors' bank accounts and psyches was awesome.
Doug Ramsey, chief investment officer of the Leuthold Group, a
Minneapolis-based investment-research firm, has an intriguing
theory. He says that after a speculative bubble and subsequent
crash, the affected stocks tend to bump along the bottom for years.
But at some point they finally regain momentum--and that's the time
to hop on board.
Tech stocks bumped along the bottom in 2003, bounced a bit in
2004, then declined again. It wasn't until mid 2009 that tech
stocks broke above their 2004 levels, Ramsey says. Twice since then
the stocks retreated to their 2004 highs, and both times they
rebounded. Those are both bullish signs.
Now, I'm not huge fan of basing decisions on charts and
patterns, but Ramsey cites other reasons to buy tech stocks. Among
them, relatively low valuations compared with other sectors, and
disciplined capital allocation by tech executives--a marked change
from the late 1990s. Nowadays, many of these companies are awash in
Just how reasonably priced are these stocks? First, in the
interests of full disclosure, Nasdaq is about half tech and
telecom; it's not the best tech index. I use it because it's the
best-known index. For more precision, let's consider the technology
sector of the S&P 500, which holds 65 tech companies, most of
them large. You can invest in the sector through the Technology
Select Sector SPDR ETF (
), an exchange-traded fund that charges just 0.16% annually.
Over the past five years through March 14, the tech SPDR
returned an annualized 21.3%--about the same as the S&P 500.
The sector doesn't look overpriced. It trades at 16imes analysts'
estimated earnings for the coming 12 months, and it yields 1.9%The
S&P 500 trades at 15 times estimated earnings and yields
What's more, over the past three years, the ETF has exhibited
about the same volatility as the S&P as a whole. That's a sea
change from the tremendous volatility tech stocks displayed in the
1990s and during their crash.
The ETF is dominated by established companies, not flashy
start-ups. Its top holdings are Apple (
), Google (
), Microsoft (
), Verizon Communications (
), International Business Machines (
), AT&T (
), Oracle (
) and Qualcomm (
). These are high-quality companies that, for the most part, should
thrive for years to come.
What's also reassuring is that you can find tech stocks in the
portfolios of top-drawer value funds that shunned them in the late
1990s, such as BBH Core Select (
), FPA Crescent (
) and Oakmark (
). (Note that FPA Crescent is
a member of the Kiplinger 25
and that BBH is closed to new investors.)
I don't think it will be too long before Nasdaq sets a new
record. And this time I expect it to stay above 5000 and continue
to grow.One caveat: I'm not talking here about some of the
overhyped tech stocks, such as LinkedIn (
), Netflix (
), Salesforce (
) and Twitter (
which are every bit as insanely priced
as most tech stocks were in the late 1990s.
is an investment adviser in the Washington, D.C., area.