Zico Special : Anniversary of NASDAQ 5000
As we sit on another anniversary of the NASDAQ Composite’s all time high that was reached in March 2000, commentators have come out in droves to give their two-cents worth as to why the market is about to fall and leave that “high” intact. After a very strong month it looks like that high will bebreached. In any case does it matter?
Well it’s really much ado about nothing. The NASDAQ Composite index in March 2000 is not the same index as the one today. The analogy I like to use is that of the man on boat who dropped his sword into the river, and then decides that the best way to find back his sword is to make a “mark” on the side of the boat where the sword entered into the river. Silly as it may seem, that’s what NASDAQ 5000 is all about. The boat moves, the river moves and even the sword moves in the river.
The composition of the index has changed over time as the stock market evolves over time.
First the NASDAQ Composite is no longer as tech laden as before. Back then, technology stocks made up 57% of the index. Although still significant it now makes up 43%. It is also made up of larger and fewer companies. The largest company listed on NASDAQ at the start of 2000 was Microsoft, and its market cap was US$606 billion. Microsoft is now the second largest after Apple, and its market last week was “only US$363 billion. Apple at more US$755 billion, back then was not even on the top ten.
Another noteworthy difference is the emergence of biotech stocks in the top ten – there are now two in the top ten now, compared to none 15 years ago. These are Gilead Sciences and Amgen. Although the valuation of the NASDAQ Biotech index is estmated as high as 400 times forward earnings, and has been described as “frothy”, the PER of Gilead and Amgen are in the teens.
The overall NASDAQ Composite is nowhere nearly as overvalued today as it was 15 years ago. At the height of the dot.com bubble the NASDAQ Composite was trading at a PER of 152 times. The index is now trading at a more reasonable 26 times ( even for a index laden with growth stocks).
So what does all these add up to. The NASDAQ Composite’s all time high will be breached. But it is on the back the expensive valuations and blue sky forecasts of 15 years ago. As always how we investors will be “judged” centres on the stocks we select. And if you held Apple since 10 March 2000, NASDAQ 5000 would have been breached long ago.
A Bit About Zico
Zico is our in house equity consultant who is currently a private fund manager with more than a fair share awards in the course of his illustrious career.
Having managed both global and also regional themed equity portfolios, he specialises in stock picking that maximises returns for his various absolute return portfolios.