Archive for Saturday, March 10, 2001

Tech index falls back to earth

March 10, 2001


— A year ago Internet mania was running rampant, P/E ratios were skyrocketing and Nasdaq 6000 seemed within the realm of possibility. How things have changed.

Since the Nasdaq peaked at 5,048 a year ago today, the index has lost more than half its value, shedding more than $3 trillion in market value and leaving many ruined investors and companies in its wake.

Stung by a revenue warning from Intel, the Nasdaq composite index plummeted Friday by 115.95 to 2,052.78 its lowest close since Dec. 17, 1998, when it stood at 2,043.88. For the week, the Nasdaq lost 64.85, or nearly 3.1 percent.The Dow Jones industrial average skidded 213.63 to 10,644.62, ending a five-day winning streak. That run-up, however, enabled the index to end the week up 1.7 percent, or 178.31.

Back in the first quarter of last year, investors busily were dumping so-called "old economy" stocks in favor of white-hot Internet plays, whose power and future potential were considered limitless.

At the end of March 2000, the Nasdaq was trading at 176 times earnings, while stocks such as Cisco Systems were trading at 208 times earnings. Microsoft's price-to-earnings ratio stood at 61, while Sun Microsystems' was 105.

In the Internet arena, where analysts were evaluating companies based on "eyeballs" and other eccentric models, valuations clearly were the most bloated. Yahoo Inc., for example, traded at 914 times earnings.

"I visited a client in California at the end of 1999, who asked me why I would want to own stocks like Citigroup," recalls Marshall Front, managing director at Trees Front Associates Inc. "He said to me, 'You people in the Midwest and on the East Coast just don't get this. Don't you know the Internet is the wave of the future?' "

Lately, the Nasdaq is trading at a price-to-earnings ratio of 130. Cisco, which hit a 52-week low Friday, is trading at 50 times earnings; Microsoft is at 32; Sun Microsystems trades at 29 times earnings and Yahoo has contracted to a multiple of 112.

And those have been the lucky ones. Companies with no earnings have, in many cases, dwindled to one-tenth of their former value, or in some cases even worse. closed at $94.50 a year ago today; on Friday it traded at $2.50.

Charlie Crane, who runs a "high-octane growth" fund at Key Asset Management, said his valuation discipline was what saved him from the hype last year.

"We used good, old-fashioned discounted cash-flow analysis, which prevented us from succumbing to the temptation to chase stocks with almost no basis," he said. "But this was viewed as a dinosaur approach back then."

Front said he too he has not seen the casualties "that our brethren have had" because he reduced his holdings in technology in January 2000 before the peak.

The speculation in 1999 and the first quarter of 2000 was not a new phenomenon, portfolio managers note. In fact, at any time in history when a new technology has been uncovered, investors have pushed stocks up to ridiculous levels.

In the early part of last century, the hot new thing was automobiles, then radios. Bubbles also took place in the 1960s with technology stocks and again in the 1980s within the energy sector.

"We've been through cycles before and it's always unpleasant to unwind the expectations." Williams said. "You can't prevent it from happening again."

Why? Money managers say it's because investors will always be lured by the prospect of huge potential profits in other words, easy money.

"People fail to learn the lesson," Front said. "Let's face it, (this time) we had a whole new generation of suckers."

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