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)



Qualcomm (Nasdaq: QCOM)



Oracle (NYSE: ORCL)



Microsoft (Nasdaq: MSFT)



Apple (Nasdaq: AAPL)



*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
















*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


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


Long-Term Earnings-Per-Share Growth Estimate


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.