Deconstructing the Nasdaq 100
30-Mar-01 00:14 ET
[BRIEFING.COM - Gregory A. Jones] Like us, you have probably read those articles that mention that the Nasdaq 100 price/earnings ratio is still a lofty 100. Like us, you have probably wondered about the origins of that P/E -- what do the P/Es on individual Nasdaq 100 stocks really look like. Unlike us, it's not your job to go do that kind of legwork. So we had better get to it.
There are all sorts of ways you can look at Nasdaq 100 valuations, and all sorts of arguments that can be made to support overvaluation, undervaluation, or perfect valuation. We're not going to get into those arguments today -- we just want to offer you some different looks at the valuations of the 100 individual stocks.
The Overall P/E
Though you might have thought we just pulled that 100 P/E figure out of a hat, that is in fact the current P/E for the Nasdaq 100, based on trailing twelve month earnings and Thursday's closing prices. Outrageous, you might think. But it's not as bad as it sounds. We arrive at this P/E by adding total prices and dividing by total earnings. The problem is that some companies are losing considerable amounts of money, and therefore skew the entire calculation.
Another way to look at the Nasdaq's P/E is to look at only the stocks that have had earnings over the past 12 months. Of the Nasdaq 100 stocks, 81 have been profitable over the past year (excluding charges), while 19 have not. For those 81 stocks that have made money, the P/E is a much more reasonable 33. That's not cheap, but it's not 100 either.
One other way to look at the NDX valuation is to calculate the P/E based on forward earnings. This can be a very dicey game, however. Current earnings projections are in freefall, so a forward P/E that looks reasonable today might be quite rich tomorrow. Furthermore, it is difficult to compare apples with apples. What you would like to see is future earnings estimates that all cover the same period. In reality, you tend to get estimates for the next fiscal year, whose end-date can vary from early 2002 to early 2003. That's far from ideal. Nevertheless, we calculcated the Nasdaq 100 forward P/E for the 85 stocks that are expected to make money next year. The result: 28. Again, not absurd, but not what you would historically consider cheap.
The Individual Stories: Past
We also wanted to see a ranked list of the Nasdaq 100, to get a sense of which companies were keeping the P/E high. The list of high P/Es was surprisingly long. First, we present the trailing twelve month P/E for the 81 profitable companies, ranked from highest to lowest.
Ticker P/E
ERTS 374
EBAY 126
GMST 125
IDPH 124
BEAS 105
PMTC 101
CIEN 86
VRSN 85
NOVL 84
JNPR 76
PSFT 73
VRTS 72
PAYX 59
ITWO 58
PALM 57
MERQ 57
AMGN 56
MEDI 55
SBUX 54
CHKP 54
CEFT 51
QCOM 51
BRCD 51
CHIR 50
INKT 50
SEBL 50
AAPL 49
CNET 48
IMNX 47
SPOT 46
NTAP 44
BBBY 43
GENZ 41
CMVT 40
INTU 40
TMPW 40
MXIM 39
RNWK 38
LLTC 37
FISV 36
BGEN 36
AMCC 35
RFMD 35
BMET 34
CTXS 33
ORCL 33
XLNX 33
DELL 32
BVSN 32
YHOO 32
VTSS 31
MSFT 31
CTAS 31
BRCM 28
COST 28
ERICY 28
ADBE 28
JDSU 27
MOLX 27
RATL 26
SPLS 24
PMCS 24
TLAB 24
QLGC 24
ALTR 23
CSCO 23
SUNW 23
CPWR 23
CMCSK 23
MCHP 22
KLAC 21
SANM 19
FLEX 19
NVLS 18
ATML 18
AMAT 17
CNXT 17
INTC 16
ADCT 15
SSCC 13
WCOM 11
PCAR 8
Next, we rank the 19 companies that lost money last year. Since you can't calculate a meaningful P/E ratio without earnings, we opted for a P/S, or price/sales ratio (calculated using Thursday's market cap figure divided by trailing twelve month sales). The perils of P/S ratios are by now well-known, and we wouldn't recommend comparing a P/S on a telecom company with the P/S of a biotech company. It's a meaningless comparison. But we wanted some way to rank those that are losing money, so here goes.
Ticker P/S
HGSI 202.5
ABGX 34.1
MLNM 28.2
MFNX 15.5
VSTR 12.6
EXDS 6.4
LVLT 5.3
ARBA 5.0
DISH 5.0
MCLD 4.0
XOXO 3.2
ATHM 2.9
ADLAC 2.5
NXTL 2.0
USAI 1.9
AMZN 1.3
CMGI 0.7
COMS 0.6
Note that the companies in the "loser" camp tend to hail from three sectors: telecom services (9), Internet (4), and Biotech (3). COMS and USAI are the only stocks that don't fit into these three categories. In the case of telecom services and biotech, initial investments to build networks or develop drugs tend to lead to losses in the early years. That doesn't mean these stocks are cheap, but it helps to explain the lack of earnings.
The Individual Stories: Future
This is where we get into dangerous territory: forward P/Es. The following table of the 85 companies is based on expected earnings for the coming fiscal year. As noted before, there are two problems here. First, the fiscal years vary quite a bit, so this is not a straight apples to apples comparison. Second, some of the "cheapest" stocks are stocks that are widely expected to warn soon, and whose estimates haven't yet been adjusted as a result. They include companies such as: BRCD, QLGC, and TLAB. They may turn out to be cheap after all, but there is a significant risk that their forward estimates will be cut (and P/Es will rise) in the near future. Despite those caveats, this is nevertheless an interesting list.
We were particularly surprised to find that Internet stocks still command a premium, despite the fact that the Internet's hockey stick growth curve assumption no longer appears valid. CNET, ATHM, YHOO, and EBAY are all high on the list, and of course AMZN doesn't even make this list yet due to lack of earnings.
Ticker P/E
PALM 800
COMS 190
RFMD 188
SPOT 129
DISH 85
CNET 84
ERTS 78
ATHM 74
YHOO 68
EBAY 53
IDPH 52
PAYX 45
IMNX 44
BEAS 42
AMCC 41
CHIR 41
AMGN 41
XLNX 38
SBUX 36
VTSS 36
PMCS 36
KLAC 36
CIEN 36
VRTS 35
MERQ 35
QCOM 34
RNWK 34
AAPL 33
VRSN 33
GENZ 33
INKT 33
BBBY 32
MEDI 32
NOVL 32
NTAP 31
MCHP 30
BRCM 30
CEFT 30
JNPR 29
MXIM 29
BGEN 29
BMET 28
JDSU 28
MSFT 28
INTU 28
CMVT 28
ALTR 28
ORCL 28
SEBL 28
DELL 27
ITWO 27
INTC 27
LLTC 27
PSFT 27
ADCT 26
FISV 26
CTAS 26
CHKP 26
AMAT 25
BRCD 24
MOLX 24
COST 24
ERICY 23
CSCO 23
ADBE 22
SUNW 22
CTXS 22
RATL 21
NVLS 21
TMPW 20
ARBA 19
GMST 19
BVSN 18
SPLS 17
QLGC 17
PMTC 17
WCOM 16
TLAB 15
CPWR 15
PCAR 14
FLEX 14
SANM 13
ATML 12
SSCC 7
And finally, the 15 companies that are expected to lose money in their next fiscal year, ranked by P/S ratio. All the usual warnings apply for both forward estimates, fiscal years, and P/S ratios.
Ticker P/S
HGSI 91.7
ABGX 38.9
MLNM 21.9
VSTR 4.6
CMCSK 3.6
MFNX 2.9
LVLT 2.0
MCLD 1.9
ADLAC 1.9
CNXT 1.8
EXDS 1.6
USAI 1.3
NXTL 1.1
XOXO 1.0
AMZN 0.9
CMGI 0.7
Expensive or Cheap?
This exercise does not offer an easy answer to a tough question: is the Nasdaq 100 still overvalued? But it hopefully helps all those who were pondering that question to examine the facts more closely. While the trailing P/E (ex-losers) of 33 doesn't sound that bad, the list of individual stocks still reveals some breathtakingly high trailing and forward P/Es. This doesn't guarantee declines for those stocks, but the experience of the past few months is that whichever stocks are near the top of the valuation list tend to be the most vulnerable.
Greg Jones - gjones@briefing.com |
