USA Today
Last week, three Wall Street strategists told clients to add to their stock holdings. Abby Joseph Cohen, the influential strategist at Goldman Sachs, upped her stock exposure to 70 percent from 65 percent. David Bowers, a global strategist at Merrill Lynch, advised clients to "overweight" U.S. stocks. And Morgan Stanley Dean Witter’s global strategist brought his U.S. equity position to "neutral," ending a two-year "underweight" position.
The bullish forecasts seem to fly in the face of continued drops in the market. But many other analysts also seem to agree with the bulls.
John Bogle, founder of the Vanguard Group, said, "The Nasdaq is getting close to its low. A lot of excess has been taken out of the system."
Keep in mind that the Nasdaq’s crash was largely a deflation of overvalued technology sector and not an all-encompassing market rout. A number of sectors, including small banks, oil services firms and even retailers, have been hitting new highs. That’s why, despite the tech bear’s drawn-out decline, there hasn’t been widespread panic in the streets as in other crashes.
And even though the Nasdaq is not far off 26-month lows, there have been recent signs of hope for tech investors. Stocks of computer chipmakers are rising in the face of rampant earnings warnings and analyst downgrades. That suggests to some that the worst possible scenarios are already priced into tech stocks.
Meanwhile, the Federal Reserve is expected to lend a hand by continuing to cut interest rates forcefully. And with many tech stocks trading at 50 percent or more off their highs, the valuations have improved to some degree.
Being bullish now might feel as unnatural as turning into a skid when driving. One of the best times to buy stocks is when earnings and gross domestic product are actually shrinking, according to Leuthold Group data.
But even one year after the Nasdaq’s comeuppance began, the bears say tech stocks that were once ridiculously expensive still aren’t cheap.
The average Nasdaq stock is selling at 101 times past 12-month earnings, said InvesTech Research. While that’s down sharply from the 246 multiple at its peak in February 2000, it’s still sky-high by historical standards. The median P-E of the average stock in the Standard & Poor’s 500 dating back to 1926 is 16, according to the Leuthold Group.
But whether you’re a bull or bear, it’s clear that investors’ hopes got out of whack from reality a year ago. Consider Pumatech. While its 3,770 percent gain in 1999 was impressive enough, at the stock’s peak a year ago today it was up a stunning 5,960 percent from where it started in 1999 — not a bad run for 15 months.
Nicholas Vu, a research associate in Boston, was one of the investors who jumped into Puma-tech. He bought the stock late last year, excited about buzz around the company’s latest products. But he sold the stock in February 2001 — losing half the money he invested — after actually trying the company’s newest products, which let users connect handheld computers to the Internet.
"I wasn’t that crazy about the product," he said. "I realized it was more hype."
Pumatech’s Rowe agreed that investors’ expectations raced ahead of what the company could deliver, although he’s bullish on the prospects for the current products, which let large companies manage the scores of handheld computers issued to their employees. "With any quantum leap in new technology it takes longer to deploy than investors would want," he said.
It might be worth noting that Pumatech is now losing even more money than it was a year ago.
Pumatech was a severe example of the Nasdaq’s boom and bust, but there were hundreds more examples of stocks that had gotten whipped up in a speculative frenzy way beyond what their fundamentals would support.
In fact, since the Nasdaq’s March 10, 2000, high, 7 out of 10 Nasdaq stocks declined in value, said Ned Davis Research. Almost half suffered losses of 50 percent or more. One out of 4 stocks fell 75 percent or more.
America’s best and biggest tech companies also suffered massive declines. In the 52 weeks since the peak, 9 of the Nasdaq’s 10 largest companies lost half of their value or more, wiping out $1.1 trillion in market cap.
"I don’t see the euphoria returning," said Douglas Cliggott, strategist at J.P. Morgan.
As if the past year wasn’t painful enough for tech investors, the harsh reality is that they can probably rule out any sudden redux of the bull market, experts say. Sure, bear markets are followed by bull markets. But history says it often takes months, and usually years, for badly damaged stocks and indexes to regain their health and recoup steep losses.
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