Next Stop, Nasdaq 5000

Anniversaries come and anniversaries go, but some are accorded more importance than others. Married one year? The traditional gift is paper. Married 50? It's your golden year. 

On Wall Street, the anniversaries to note now are wood, for No. 5, and ivory, for No. 14. That's because stocks just marked both milestones. The fifth anniversary of the March 9, 2009, financial-crisis closing low on the Standard & Poor's 500 index has gotten all the attention, but one of these days, the focus will return to the 14th. That would be the Nasdaq Composite's March 10, 2000, closing high of 5048.62, after which the tech-stock-laden index promptly fell almost 80%, as investors divorced themselves from all things tech-related. The Nasdaq hasn't come close to that level since, but it is on course to do so now, and perhaps sooner than many think.

The S&P 500, which closed Friday at 1878.04, has gained 178% since its 2009 low, hitting multiple new highs along the way. The Nasdaq still sits 14% below its peak, although it has rallied 242% from its low of 1268.64, achieved in March 2009. The Naz, which has benefited in recent years from gains in biotechnology stocks such as Biogen Idec (ticker: BIIB) and Regeneron Pharmaceuticals (REGN), ended last week at 4336.22.

Nasdaq 5000 was something many on Wall Street thought they'd never see again. Back in the late 1990s, investors engaged in a collective myopia about dot-com shares, valuing now-departed companies such as drkoop.com, Pets.com, and Prodigy on the number of eyeballs viewing their Web pages, not quaint metrics like profit. When my colleague Jack Willough by wrote in an October 2000 story in Barron's that many dot-coms were burning through cash at a rate that could lead to extinction, the Nasdaq dropped another 3%. The market learned a bitter lesson: Irrational exuberance leads to unhappy endings.

Yet, the Nasdaq, having popped above 4000 in November, likely is on its way to 5000 again. Last year the index rose 38%, its biggest gain since 2009. While some took that as reason to worry, big advances often have followed each other, says Bespoke Investment Group's Paul Hickey. After 2009's 44% rise, for instance, the Nasdaq added 17% in 2010. Even in 2000, when it fell 39%, the benchmark surged 24% to start the year before beginning its long slide into near-oblivion.

Overall, Hickey notes, the index has averaged a 16% gain in the calendar year following a rise of 25% or more. That would "take you right near those highs," he says.

While some see the Nasdaq's rebound as a warning, Michael Shaoul, CEO of Marketfield Asset Management, notes a stark difference between past and present. "If the last tech cycle was about the promise of the Internet and its potential, this one is about the delivery of that promise," he says.

Shaoul adds that he wouldn't be surprised to see the Nasdaq Composite hit 5000 before the current bull market ends.

CONSIDER WHAT 14 YEARS has done to today's tech sector. Instead of facing a cash drain, tech companies have so much money they don't know what to do with it.Google (GOOG) and Facebook (FB) make waves by buying up smaller tech outfits like Nest and WhatsApp, while Apple (AAPL) has been forced -- or convinced -- to return cash to shareholders.

It is easy to find companies that sport valuations rekindling fears of a dot-com-like bust:Tesla Motors (TSLA) trades for 150 times future earnings; Netflix (NFLX), 113 times, and Twitter (TWTR), an outlandish 3,196 times. But valuations overall are far from absurd. The Nasdaq trades for 21 times the next four quarters' estimated earnings, with most of the excess in smaller tech companies, not index behemoths. Of the top 10 stocks by market capitalization, eight trade below 25 times forward earnings.

"Companies were a lot more speculative back then," says Thomas Lee, chief U.S. equity strategist at JPMorgan. "Today [the index] is driven by large-cap, high-quality businesses."

Nor is the market demanding much of big tech today. While analysts forecast that S&P 500 tech-sector earnings will increase by 8.3% in 2014, according to Thomson Reuters I/B/E/S, the stocks are priced for long-term earnings growth of just 2.2%, says Joe Mezrich, head of quantitative strategy at Instinet. If the market is wrong, tech stocks would have to gain 17% to catch up to the S&P 500's 5% growth. "If you plug that into the Nasdaq you get 5000," he says.

If there is a danger, it's the frothiness in the market's hottest stocks, says David Kelly, chief global strategist at JPMorgan Funds. His biggest fear is that the market will overshoot, which makes the close proximity of the two anniversaries -- the S&P 500's bottom and the Nasdaq's top -- a useful reminder not to let fear or greed get in the way of investing. "You don't want to be the last one at the party or the last one to leave," Kelly says. "Get there early, and go home early."

So celebrate Nasdaq 5000 if and when it comes. Just keep the festivity within limits. 

News Source: online.barrons.com