Editor’s Note: On Monday, March 9th, Apple CEO Tim Cook is finally going to unveil the Apple Watch to the world. No doubt it will catapult Apple even higher — as did the iPod, iPhone and iPad before it. But what most investors don’t realize is that there’s a much smaller company set to soar even higher because of the Apple Watch. And Apple would prefer you didn’t even know it exists! Sounds incredible, but that’s a measure of just how crucial the company is to the tech giant. And it’s all the more reason why you should be in it, too. But you must hurry: Once March 9th arrives, your chance to profit from one of the easiest no-brainers of the year will be gone. Find out why right here.
The Nasdaq Composite index closed above 5,000 on Monday for the first time since March 10, 2000. That day marked the height of the dot-com bubble. It was all downhill from there until October 2002, with the Nasdaq Composite declining more than 75% in just over a year and a half.
Much has been made of Nasdaq 5,000 – the technology-heavy stock index reclaiming its dot-com era highs of 5,000.
Some have pointed to the Nasdaq reclaiming 5,000 as a clear sign of a new bubble in tech stocks. I disagree with this sentiment.
Whatever you think of Nasdaq 5,000, one thing seems clear: This time is different.
Below is a chart that shows the Nasdaq Composite over the last 40 years. As you can see, the period we refer to as the dot-com bubble era is marked by a dramatic spike higher, followed by a dramatic spike lower right around the start of the new millennium.
One could look at this chart, and the rapid move higher over the past few years, and argue that it illustrates a current stock market bubble. I disagree.
Take a look at this chart of Johnson & Johnson (NYSE: JNJ) over almost the same period. Though not subject to the same dramatic swings, even shares of this boring dividend champion have experienced what looks like a dramatic increase in recent years.
With a PE ratio of just 17.94, I’d hardly say that Johnson & Johnson stock is in a bubble, yet the chart illustrates a dramatic increase in recent years that resembles that of the Nasdaq Composite index.
Today the Nasdaq 100 has an average PE ratio of around 23. Compare this to the PE ratio at the height of the dot-com bubble of 105. Again, I’d hardly say this points to a bubble in technology stocks.
Just take a look at how quickly the market rose in the year leading up to the peak on March 10, 2000. Indeed, the Nasdaq Composite rose more than 120% in just a year.
Compared to the 120% gain in the Nasdaq Composite in the year leading up to the market collapse, the Nasdaq Composite is only up a very reasonable 14% over the past year.
Though the Nasdaq Composite has taken off since its post-financial crisis bottom and is now up more than 260%, I hardly call this evidence of a tech bubble. For its part, the S&P 500 is up nearly 175%.
Meanwhile, corporate profits continue to surge, particularly among technology companies.
The PE ratios of the largest technology companies in the world continue to fall. Microsoft (NASDAQ: MSFT) trades at a PE ratio of 17.5. Apple (NASDAQ: AAPL) trades at a PE ratio of just 17.4. Google (NASDAQ: GOOGL) trades at a PE ratio of 28.6.
These valuations are a far cry from the bubble-era PE ratios well north of 100.
Of course, there are stocks that I think are way too expensive. Yelp (NASDAQ: YELP), with a PE ratio of 162, is just one example. But to label the whole industry as a “bubble” is a big mistake.
Indeed, Nasdaq 5,000 is an important milestone and, 15 years later, things are different this time.
I would have a tough time arguing that stocks are cheap at current levels, but are we witnessing a new technology bubble as the Nasdaq Composite reclaims its record highs?
I believe the data speaks for itself. We are not witnessing a new technology bubble.