(Back to) Earth-Day - The Tech-Stock Crash of 1970

Tablet displaying intraday stock performance

The first "Earth Day" was launched April 22, 1970. It was also Ross Perot's "back to earth" day. Shares in his Electronic Data Systems (bought by Hewlett-Packard ( HPQ ) last year) fell $60 that day. On paper, Earth Day cost Ross Perot roughly $450 million, but he didn't seem fazed by all those paper losses.

EDS was not alone. Many tech stocks fell by 80% or more in the second quarter of 1970. Have you ever heard of that crash? No doubt you recall the tech stock crash of 2000-02 and the general 1973-74 crash -- but few remember the 1970 crash. The S&P 500 fell 19% that quarter, and the Dow fell 13%. The core of the 1970 crash came in just five weeks -- from April 20 to May 26 -- when both major indexes fell 19%.

The average computer stock fell 80% from its peak in late 1968 to the May 1970 lows. Perot's EDS shares fell 85%, from $162 to $24. Other big-name tech stocks fell almost as far: Control Data fell 83%, Mohawk Data 84%, Sperry Rand 72%, and NCR fell 64%. Some lesser-known names fell further. University Computing fell from $186 to $13 (-93%); Data Processing Financial fell 94%, from $92 to $6.

The situation was just as bad for a new group called "conglomerates." The 10 largest conglomerates of the late 60s lost an average of 86% by May, 1970. Ling-Temco-Vaught was down 95%, from $135 a share to $7. Levin-Townsend fell from $67 to $3 (-96%). Litton Industries was down 86%, from $104 to $15. Walter Kidde was off 82%. Even household names like Polaroid fell 64%, Texas Instruments ( TXN ) fell 57% and General Instruments 83%. IBM ( IBM ) only lost 42%, but that was $18 billion, the biggest dollar-loss.

Tech Stock Crash of 1970

Why the drop in computer stocks in 1970, when everyone was buying computers? IBM couldn't fulfill growing demand for its new System 370. In fact, one cause of the tech crash was IBM's sales strategy: The Justice Department accused IBM of "bundling" its hardware and software together. IBM fought Justice in a 13-year legal battle, which was finally thrown out of court in 1982 as being a "relic of another era." By then, of course, Intel and Apple had changed the competitive landscape and IBM's stock was languishing. Its price remained basically flat from 1968 to 1993, when Lou Gerstner took over as CEO.

Like most crashes, the 1970 tech stock crash came after a time of excess euphoria, which lifted tech stocks into outer space, parallel with the Apollo moon flights of the late 1960s. Like most manias, this one stemmed from a mantra of "this time, it's different."

According to a crash post-mortem in Dun's Business Review (January, 1971), a "rapid growth myth" led investors to think that compound annual growth rates of 30% or more could go on for an extended period of time, but Dun's showed that "there is no known instance of a company that has been able to achieve a 25% compounded growth rate over a 20-year span." Moreover, Dun's said, studies revealed that "a 20% compounded growth rate over a 10-year period is an unpredictable rarity." In fact, only 2% of firms sustained a 20% growth rate during the 1960s.

There was also an external "wall of worry" in the spring of 1970. First came Apollo 13's near-fatal moon mission (April 11-17), followed by President Nixon's incursion into Cambodia (April 29), the resulting nationwide campus riots and shootings at Kent State (May 4) and Jackson State (May 14), all amidst a recession, overtly engineered by Nixon in 1969 as a way to fight inflation by "cooling the economy."

But the main cause of the 1970 crash, like the tech stock crash of 2000, was low or no earnings. The average P/E of tech stocks in 1968 was 114. Computer-makers sold at 103 times earnings. EDS' peak P/E in 1968 was 352. By comparison, the Dow stocks sported an average 16 P/E during the peak year, 1968. At the time, industry analysts justified super-high tech-stock P/Es, saying that "equities in the new, growth industries could be expected to outperform the market as a whole." Sound familiar? That was the 1999 mantra, too. In 1970, as in 2000, a recession followed the "longest peacetime expansion in history."

Tech stocks today - are they overvalued?

In sharp contrast to the triple-digit tech stock P/Es of 1969-1970 and 1999-2000, today's tech stocks sport admirably low P/E ratios. Analysts now see Intel's earnings reaching $1.85 in 2010. At current share prices of $24 or less, that's a low (sub-13) P/E ratio for the chip leader. For IBM, analysts see 2010 earnings of $11.20, for a modest P/E of 11.5 at $129 per share. There certainly is euphoria about Apple ( AAPL ), having tripled in price from its early 2009 lows to reach $223 billion in market-cap, behind only ExxonMobil ( XOM ) and Microsoft ( MSFT ), but Apple's forward-looking P/E is only 18.5, based on sales of its popular iPads, with several more popular items in the pipeline. We seem to be early in the tech growth cycle.

I remain bullish in general on the tech sector, and do not think these stocks are overbought yet. In the near term, you can invest in tech with confidence.

As of this writing, Louis Navellier owned shares of Apple ( AAPL ) in personal or client portfolios.

Related Articles:

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.