Will The Nasdaq Ever Hit 5,000 Again?

Last week, we celebrated the 10-year anniversary of the Nasdaq's all-time high at 5,048.62 ... with the index at less than half that value. Will it ever get back to 5,000? Of course -- inflation alone will eventually see to that. The real question is: How long will it take?

Some hard numbers
First, some remarks on where we've been since that milestone. Here's how some of the bellwethers of the tech industry -- five among the top eight Nasdaq stocks by current market value -- fared in the decade beginning March 10, 2000:

 

Annualized 10-year Total Share Return (Mar.10, 2000 – March 10, 2010)

Annualized 10-Year Earnings-per-Share* Growth

Cisco (Nasdaq: CSCO  )

(9.2%)

11.9%

Qualcomm (Nasdaq: QCOM  )

(4.7%)

18.1%

Oracle (NYSE: ORCL  )

(4.8%)

16.9%

Microsoft (Nasdaq: MSFT  )

(3.4%)

8.7%

Apple (Nasdaq: AAPL  )

21.7%

27.2%

*Diluted EPS excluding extraordinary items.
Source: Capital IQ, a division of Standard & Poor's.

Save for Apple (we'll get into that case in a bit), the returns on these stocks over the past decade were simply dreadful -- and keep in mind that by virtue of the sample, these are the "winners" of the technology revolution. For example, investors who held onto shares of Cisco during this period saw over 60% of their investment evaporate.

Winning companies, losing stocks
The column's second column shows that these companies were indeed winners (even if their shares weren't). All managed to grow earnings-per-share much faster than the overall growth rate of the economy. In some cases, such as Apple, much, much faster. Since share price returns can be broken down into earnings-per-share (EPS) growth and price-to-earnings (P/E) multiple growth, and the former isn't to blame for the stocks' lousy returns, that suggests the latter is the culprit. The following table confirms these suspicions:

 

Price-to-Earnings Multiple*, March 10, 2000

Price-to-Earnings Multiple*, March 10, 2010

Cisco

201.7

24.9

Qualcomm

288.4

31.2

Oracle

169.3

21.7

Microsoft

64.1

16.0

Apple

34.1

21.9

*Based on trailing twelve months' diluted EPS, excluding extraordinary items.
Source: Author's calculations, based on data from Capital IQ, a division of Standard & Poor's.

The revaluation tsunami
Price-to-earnings multiples got hammered over the 10-year period as absurd valuations collapsed under the weight of economic reality. In all but one case, the initial overvaluation was so extreme that when P/E multiples came down to more reasonable levels, this completely overwhelmed the positive impact of earnings growth. Even Apple, which suffered the smallest decline in its P/E multiple of the group, still got hurt: The first table shows that its total share return didn't keep pace with its EPS growth.

So much for the last 10 years. What about the future? The following table contains a few clues:

Nasdaq Composite Index

March 10, 2010

Index Level

2,358.95

P/E Ratio (estimate) -- Next Fiscal Year's EPS

16.0

Long-Term Earnings-Per-Share Growth Estimate

14.6%

Source: Yahoo! Finance, Author's calculations based on data from Capital IQ, a division of Standard & Poor's.

It's up to earnings growth
Given current valuations, I don't think we should expect much help from the P/E multiple in the coming years (i.e., the index looks fairly valued, at best). In other words, we'll have to rely on earnings growth to take up the task. To try to gauge this factor, I calculated an earnings growth estimate for the Nasdaq Composite Index by averaging analyst estimates for all individual companies in a sub-index, the Nasdaq-100 index (which represents approximately two-thirds of the market value of the Composite index).

6.5 years ... at best
Assuming no change in the index's valuation and using my EPS growth estimate of 14.6%, we could get back to 5,000 in about 5.5 years. Given the lingering risks in the macro-economy and existing tailwinds to growth, that looks optimistic to me. I think if the index achieves annualized EPS growth of 12%, it would be a good result -- which would push our goal out by about another year. While a time frame shorter than 6.5 years looks unlikely, it could conceivably take quite a bit longer.

In short, I expect it will take the Nasdaq the better part of 20 years to recover its March 2000 high. That is a damning indictment of "buy-and-hold" zealotry. For value-focused stockpickers, however, some Nasdaq stocks look, on a first pass, like they offer decent odds of beating their index over the next five to seven years. These stocks include Cintas (Nasdaq: CTAS  ) , Fiserv (Nasdaq: FISV  ) , Foster-Wheeler, and Comcast.

Lesson learned?
Unfortunately, investors appear to have extraordinarily short memories; it's not clear that they remember (or perhaps ever learned!) the lessons of the Nasdaq crash. I suppose there is little one can do to contain peoples' propensity to believe in new paradigms. Nevertheless, those who wish to hold onto their assets would do well to study this example to hammer home the notion that, while society benefits from entrepreneurs fuelled by hopes and dreams, investors are better off tethering their goals to plain notions of economic value.

Tech companies like to hoard cash instead of returning it to shareholders, but dividends have historically contributed 40% of stocks long-term total return. Tim Hanson identifies six stocks on the watch list of the Fool's dividend-stock analysts.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Cintas and Microsoft are Motley Fool Inside Value picks. Apple and Cintas are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2010, at 2:32 PM, demodave wrote:

    Under "Lesson Learned", a few thoughts are sparked:

    "Nasdaq Crash" = "bubble bursting", no? And I don't think that there is any way to "unlearn" greed (see also Gordon Gecko).

    Isn't believing in new paradigms the whole point of the "Rule Breakers" philosophy?

    "plain notions of economic value" and ridiculously high multiples (288?!?!?) also seems to speak to a review of another one of the principles that were indicated by the Motley Fool some years ago (and even for ages before that): "the dogs of the DOW".

    I realize that in phrasing my response this way I am just throwing tennis balls at a guy who is already juggling, but I have to wonder if you all don't think about the coherency of the messages that you send out.

    One final thought, preceded by a question for clarification: does Apple's current P/E valuation of 21.9 reflect the "new", "non-GAAP" standards? If so, I would think that the forward earnings potential or Apple is exceptionally strong.

  • Report this Comment On March 15, 2010, at 2:49 PM, TMFAleph1 wrote:

    Thanks for your comments, demodave.

    The P/E multiples contained in the table are based on GAAP earnings-per-share.

    Alex Dumortier

  • Report this Comment On March 15, 2010, at 5:46 PM, hasty1982 wrote:

    Pretty scary it could take that long, but anyone with a brain would have stayed away from tech stocks back then. It's nice to say that if you invest right now that you will not be buying over-valued companies though.

  • Report this Comment On March 15, 2010, at 7:27 PM, stan8331 wrote:

    The problem wasn't so much absurdly high valuations as it was the fact that there were no fundamentals in place to realistically support those valuations. That's where we run into trouble - when there's a widespead assumption that a concept (the Internet) leads to massive revenue increases without any detailed explanation of how that's going to happen.

    The way to know you're in a bubble is when folks look at you like you're nuts for asking to see the details...

  • Report this Comment On March 15, 2010, at 8:51 PM, jdlech wrote:

    Don't you just love these idiotic statements?

    "Will The Nasdaq Ever Hit 5,000 Again?"

    Of course it will. Inflation guarantees it. It's not a matter of "if", but a matter of "when". Consider the effect of a hundred years of a mere 1% inflation on the Nasdaq. From the close of today at 2362.21 yields 6,389.34 in a hundred years.

    Care to bet inflation will not be more than 1% over the next hundred years? Now how about the next 200 years? Does anyone REALLY think the Nasdaq might not hit 5K EVER AGAIN?

    Such absurdity.

    At a mere 4.5% inflation, the Nasdaq should hit 5K in just 17 years. At 9% inflation, it reaches that level in a mere 8 years, 8 months.

    And all that is not even considering any genuine rise in the market itself - just a rising tide that raises all boats.

  • Report this Comment On March 15, 2010, at 9:14 PM, greedwhenfearful wrote:

    Dollar cost averaging. This is why buy and hold can work. Anyone who owned at the top of Y2K would still be doing great if they kept purchasing after the crash. Slowly dollar-cost averaging into Cisco, Microsoft, Apple, etc.

    That's why the lesson of the dot com bubble is focus on great companies and the rest will take care of itself.

  • Report this Comment On March 15, 2010, at 9:14 PM, greedwhenfearful wrote:

    Dollar cost averaging. This is why buy and hold can work. Anyone who owned at the top of Y2K would still be doing great if they kept purchasing after the crash. Slowly dollar-cost averaging into Cisco, Microsoft, Apple, etc.

    That's why the lesson of the dot com bubble is focus on great companies and the rest will take care of itself.

Add your comment.

DocumentId: 1134911, ~/Articles/ArticleHandler.aspx, 7/30/2014 9:22:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement