It's Not Your Father's NASDAQ 3,000

MSN Money March 16, 2012

3/15/2012 4:40 PM ET

By Jim Jubak

The technology-laden index just hit its highest level since 2000 and is poised to go higher. And the tech sector is older, wiser and much less risky than it was a decade ago.

The Nasdaq Composite Index ($COMPX) broke 3,000 on Tuesday for the first time since 2000.

The 11-year high for the index brings back memories of those days in 2000 when the dot-com bubble pushed the technology-laden index to a high of 5,048.62. (These days, the 500 or so technology stocks that trade on the Nasdaq market account for almost 50% of the market-capitalization weighted index.)

But breaking the 3,000 level is neither a signal to put the champagne on ice so it will be chilled in time to celebrate the Nasdaq hitting 5,000 nor to run in fear yelling, "The sky is falling again."

Truth is, this isn't your father's technology sector. We're headed neither to the moon nor into the abyss.

Which is why, even with the Nasdaq at 3,000, this is a good time to invest in technology stocks -- as long as you understand the big differences between the current technology market and that of 2000.

I can think of four major differences.

Why did the Nasdaq crash?

First, the shares of the big, established technology companies are much cheaper than they were in 2000. To take the extremes, look at Cisco Systems (CSCO, news) then and Apple (AAPL, news) now.

In April 2000, just as the bubble had started to burst, Cisco Systems sold at a price-to-earnings ratio of 199.84, comparing the stock price at the time to trailing 12-month earnings. Apple's March 14 price-to-earnings ratio on trailing 12-month earnings is just 16.63. (Suffice to say, this is a common measure of a stock's relative value -- and the lower number here is a lot cheaper.)

Jim Jubak

Cisco Systems and Apple aren't isolated instances. Marc Faber calculated in the fall of 2000 that the Nasdaq as a whole traded at 240 times projected 2000 earnings per share. The New York Times, working the numbers today, gets a 2000 price-to-earnings ratio of 155. (The difference, I think, depends on how you treat companies with no earnings and therefore infinite price-to-earnings ratios. There were a lot of those in the year 2000.)

The current Nasdaq price-to-earnings ratio is below 20, according to the Times.

Today's technology sector is just not as dangerous as the sector was in 2000. Yes, technology stocks could fall from today's 3,000 level. But the drop would likely be a correction and not the kind of plunge that we saw from 5,048.62 on March 19, 2000 to 1,114.11 on October 9, 2002.

2. Mature companies, not startups

Second, the big companies that dominate the sector's market cap now are a lot more mature than these same (and other, now-departed) big-cap companies were in 2000. That means there are more earnings to support prices and price-to-earnings ratios in the sector -- and also lower earnings growth rates, because bigger companies, by and large, don't grow revenue or profits as quickly as small companies do.

Look at the projected annual growth rates for these big technology giants in the 2012 market:

Intel (INTC, news) is projected to grow by 9.9% annually over the next five years. Microsoft (MSFT, news) earnings are expected to grow 8.8% a year over the next five years. Cisco's earnings growth is projected at 8.4% annually over the next five years. (Microsoft is the publisher of MSN Money.)

These are the kind of growth rates you expect from companies such as Coca-Cola (KO, news), McDonald's (MCD, news) and Wal-Mart Stores (WMT, news). Wall Street projects five-year annual earnings growth for those companies at 8%, 9.6% and 10.6%, respectively.

Even if you go down a level in size from these tech giants to a faster-growing part of the sector, you won't find the kind of projected growth that Wall Street publicized for the sector in 2000. F5 Networks (FFIV, news) is looking at 21.9% annual earnings growth over the next five years. Qualcomm (QCOM, news) is projected to grow at an annual 15.4% pace. Broadcom (BRCM, news) earns a 14.6% annual growth estimate.

One of the costs of the sector's greater maturity is slower growth. The lower price-to-earnings ratio for the sector is largely justified. But with maturity comes stability.

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"The consumer price index rose a seasonally-adjusted 0.4 percent in February, with the gas component driving over 80 percent of the change. It was the biggest increase in 10 months."

"The central bank reiterated its expectation that overnight interest rates would remain near zero until at least through late 2014."

So the money you have shrinks while you get nothing on any saving CDs & money market you might have.

Thanks Federal Reserve for causing this mess that us Americans have to live with.

1 0ReportSpamJeremy123413 hours agoMe thinks exuberance has taken over this market... me thinks low volume because less active participation-- the major traders are trading with themselves. And me thinks these traders want a sucker they can sell high too. Me thinks they'll find some idiots-- then soon after market it fart. 3 3ReportSpamhavasu4614 hours agoBe very, very careful grasshopper. Projecting 10% growth over the next 5 years and no really big technological changes sounds like somebody knows more than the rest of us. If somebody grows that fast me thinks somebody might lose some too. 6 9ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment?/**/ DATA PROVIDERS

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Look at the projected annual growth rates for these big technology giants in the 2012 market:

One of the costs of the sector's greater maturity is slower growth. The lower price-to-earnings ratio for the sector is largely justified. But with maturity comes stability.

It's Not Your Father's NASDAQ 3,000

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