THOSE NUTTY Nasdaq Stocks Can't All Hold Up Forever : LUSENET : TB2K spinoff uncensored : One Thread

This is from the, March 09, 2000


I have no idea what happened so lets try that again.

This is from the Sun Herald

[Fair Use: For Educational/Research Purposes Only]

Jeff Brown

Those nutty Nasdaq stocks can't all hold up forever Get hip, get happening - get on the cutting edge with the ''New Economy.'' That tired, boring ''Old Economy'' is for fuddy-duddies.

So goes the current investment rationale. That's why New Economy stocks in technology, telecommunications, Internet and biotech companies have led the Nasdaq to a 17.5 percent gain this year. Investors are willing to bid prices up to extraordinary levels to get those hot stocks.

Meanwhile, General Electric and other Old Economy stocks in the Dow Jones industrial average are looking like buggy-whip makers. Investors are shunning them, and the Dow is off 11.8 percent in just two months.

In the short run, you ignore the New Economy mania at your peril. Demand could continue to propel these stocks upward even if investors' exuberance is excessive. You can retreat to the sidelines grumbling that Nasdaq fever is nutty. But even if you're right, you might then miss some fabulous gains if the nuttiness continues for a while.

That's in the short run. In the long run, the dull Old Economy stocks don't really look so bad next to the fluffed-up Nasdaq issues. While some Dow companies have brighter prospects than others, these issues aren't headed for the scrap heap. Many make products we will use no matter how enamored we get of our Internet portals and cell phones - cars built by General Motors, aluminum refined by Alcoa and hamburgers grilled by McDonald's.

While the Nasdaq is full of hot stocks, some of which will certainly have wonderful futures, you don't eat Internet services or drive to work on software. We live in a world full of physical products.

Another reason not to overlook the Old Economy stocks: They aren't as risky.

Among the Dow stocks, the ratio between share price and the last 12 months' earnings is about 23 to 1, down from 28 in September. The lower the P/E, the lower the risk.

At current prices, a dollar put into a Dow stock buys 4.35 cents in earnings. It's like getting 4.35 percent in a bank account or on a bond. That means Dow stocks compete pretty well with those alternative investments. So the risk that investors will rush out of Dow stocks and into, say, bonds, isn't very high.

Since September, the P/E ratio of the Nasdaq 100, which is the 100 big-company stocks that dominate the Nasdaq index, has risen from about 100 to a record of 140.

That means every dollar spent on a Nasdaq 100 stock buys only .7 cents of earnings. It's like putting your money into a savings account that pays only 0.7 percent. That's about one-sixth what you get with a Dow stock.

With a P/E ratio that high, there's always a good chance investors will suddenly decide they're not getting enough for their money. If they rush out of Nasdaq stocks and into Dow stocks, bonds or bank savings, collapsing demand will cause Nasdaq share prices to plummet. Merely falling back to last fall's already high P/E of 100 would cause Nasdaq stocks to drop by nearly 30 percent.

So while Dow looks like a bargain, the Nasdaq 100 looks like Russian Roulette. Of course, investors don't seem to care much about current earnings when they buy Nasdaq stocks. They're betting that future earnings will be wonderful.

No doubt that will happen - for some of them. But here's what it would take for the Nasdaq 100 P/E to fall to the Dow level on the basis of earnings gains rather than a stock price collapse: Earnings would have to rise sevenfold.

A really successful company can get earnings to rise by 20 percent a year. With earnings growth compounding at that pace, a six-fold increase would take 10 years.

Even if every Nasdaq company could achieve this, these New Economy stocks would be very risky for a very long time. If you're a bargain hunter, try the Old Economy.


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Jeff Brown writes about personal finance for The Philadelphia Inquirer, P.O. Box 8263, Philadelphia, PA 19101. Send e-mail to on the Internet. Questions cannot be answered personally.

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-- Zdude (, March 09, 2000.

Earnings? Oh man, that is soooooo last millennium. No one buys tech based on earnings. They buy it because tech is just going to keep going up and up. Every decline is a buying opportunity and the market will always recover...

until it doesn't. At which point, the music stops, and many players discover that not only have almost all the chairs been removed, but so has part of the floor.

-- DeeEmBee (, March 09, 2000.

One of the brokers being interviewed on CNN Fn said that the "new economy" would have us sitting naked and starving to death with dirty teeth and smelly armpits in front of the computer screen. In other words, we REALLY can't do without the Proctor and Gambles of the world.


-- Taz (, March 09, 2000.

Ah yes, the dilemma. It is a bubble that may or may not burst fully, but for the average investor it really is a most precarious place to be, those .com wonders.

Not even the best investors can consistently time the market, so I agree with the writer of this article-I will not put a lion's share of cash in NASDAQ stocks.

Ultimately, everyone has to assess their own risk comfort level, and I am just one of those people who is happy with 10% and not reaching for the stars on speculation.

-- FutureShock (gray@matter.think), March 09, 2000.

"That tired, boring ''Old Economy'' is for fuddy-duddies."...

We still NEED the "Old Economy" for the "New Economy" to survive. Dot coms offer information services where no inventory is required, but a lot of dot coms sell stuff...from books, to cars, to groceries. Stuff that the "Old Economy" takes care of.

It's just a new delivery mechanism that's interactive in nature.

-- Tim (, March 09, 2000.


"Interactive in nature".

Is that the new economy term for, "doesn't make profits"?

-- J (Y2J@home.comm), March 09, 2000.

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