Nasdaq anniversary has sobering lessons

It has been five years since the Nasdaq Composite index, a gauge of the broad technology sector, hit its all-time peak of 5,048.62. But don’t expect the anniversary to raise much merriment on Wall Street.

Over the last five years, countless high-tech companies have folded, erasing jobs and shareholder capital. The technology index is down 60 percent from the heady heights it saw in 2000. And analysts say some of the pain in the technology sector may be yet to come.

Although they have moderated significantly, stock valuations in the technology sector remain high says Steve Massocca, head of trading for Pacific Growth Equities in San Francisco who focuses on technology investing. That’s making investors unwilling to invest in the sector, he said.

“People think technology stocks are overpriced in relation to their potential growth rate,” Massocca said. “Of course, they’ve been correcting themselves, but they haven’t quite got there yet. So I think technology will continue to be one of the lagging stock sectors because people still think the multiples in the sector are out of whack.”

Another reason for the lack of excitement about technology stocks is that, unlike the late 1990s and early 2000 when the Internet was the latest thing, today there is a lack of any new, exciting technologies coming to market Massocca added. The best that technology investors can do is look for “diamonds in the rough,” he said.

“You have to look for the companies that have excellent growth prospects, say of 25, 30 or 40 percent,” he said. “Even if they’ve been taken to the woodshed with all the other technology names, the bottom line is you can buy these stocks now at a decent multiple.”

Peter Cardillo, chief market analyst and strategist for S.W. Bach, a New York retail brokerage, is more sanguine about the outlook for the technology sector. He says that, as long as the economy continues to grow at a decent pace and it translates into capital investment, spending by companies on information technology is likely to continue, and that is good news for the high-tech sector.

But in the short-term, Cardillo says that high crude oil prices, the weaker U.S. dollar and a rise in long-term interest rates, which suggests the economy is gathering a head of steam, could weigh on technology stocks and the broader market. “The fear is how aggressive the Fed will be,” he said. “Will they have to apply the brakes and cut short economic activity?”

Dot-com dizziness
On March 10, 2000, it seemed that the Nasdaq Composite index and the dot-com boom that propelled the stock market barometer up some 800 percent from 1990 to 2000 could only surge onward. Nothing could have been further from the truth.

The index fell all the way to 1,114.11 on Oct. 9, 2002, before turning higher. Now, five years on, with an unrealistic high-tech dream destroyed and American business returned to a more sensible way of working, a still decimated Nasdaq Composite has no hopes of reclaiming its former heights anytime soon.

“Everybody got one hell of an education after the Nasdaq hit its high and the bubble burst,” said Lincoln Anderson, chief investment officer at LPL Financial Services. “It turned out that you really did need a sustainable business model that didn’t rely on untenable assumptions. It seems so basic now, but back then, who knew?”

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