Damn Lee: this is good--
Tech Stocks Jump but Earnings Still Hobbled
By Peter Eavis
Senior Columnist
5/2/01 6:52 PM ET
Whatever happened to Nasdaq 1500?
With the Nasdaq soaring 36% over a month, it appears that investors have
once again shed their reluctance to pay up for questionable earnings streams.
While no one is reviving the bubble-era argument that stock prices now reflect
rapid future profit growth, it's now de rigeur to place your faith instead in the
Fed or in technical market measurements.
But at the end of the day, people won't pay
$400 for a Big Mac just because they heard
someone else did. Yet investors now paying
more than 500 times forecast 2001 earnings
for Yahoo! (YHOO:Nasdaq - news) are
doing just that. History shows that each age
has its blind spots, and this one's
inexplicable recurring weakness is for
companies that make very little money or,
more often, none at all. Though the Nazz is nearly 50% off its high, people
investing in tech stocks are still doing the equivalent of throwing four
C-notes at a hamburger. Take a look at the price tags on tech companies.
Bargains at Half the Price
The Nasdaq 100 index has a market-cap weighted price-to-earnings ratio
of 102, based on projected 2001 earnings. By how much are Nazz 100
earnings expected to grow in 2001? They're not. They're supposed to fall
by 7%, again using a market-cap weighting that accords a 50% weighting
to the index's seven largest stocks: Microsoft (MSFT:Nasdaq - news),
Intel (INTC:Nasdaq - news), Cisco Systems (CSCO:Nasdaq - news),
Oracle (ORCL:Nasdaq - news), Dell Computer (DELL:Nasdaq -
news), Amgen (AMGN:Nasdaq - news) and Sun Microsystems
(SUNW:Nasdaq - news).
April Flowers
Detox forecasts May showers
Yes, as we all know, the stock market is a forward-looking beast and now
it's factoring in a future recovery. Sure enough, analysts expect weighted
Nasdaq 100 earnings to jump 62% in 2002 to $31.17, from 2001's
$19.20. Hence, at its Wednesday value of 1962, the Nasdaq 100's P/E
ratio for 2002 is 63. This is just about the same as its growth rate, giving a
price-to-growth ratio of 1, which, at first sight, would appear very
reasonable.
However, as the recent past has taught us, Wall Street analysts' forecasts
have all the accuracy and dependability of a $10 Rolex. Better to take an
average of the 2001 and 2002 earnings. This is fairer for the bulls because
it reduces reliance on 2001 earnings, which they see as exceptionally low
because we're in a turnaround year, and it benefits the bears who think it
foolhardy to rely on the sell side's 2002 earnings forecasts. A 2001-02
average produces $25.19 in average earnings over the two years (31.17 +
19.20 divided by 2).
The Fosbury Flop
Dividing the Nasdaq 100's 1962 by 25.19 produces a P/E ratio of 78.
Can earnings grow at 78% or more? Not without a miracle. In the boom
years of tech spending, 1998 through 2000, earnings at the tech companies
in the S&P 500 index grew by an average of 14%. Taking Nasdaq 100
weighted actual earnings for 2000 and the weighted forecast numbers for
2001 and 2002, these 100 corporations have an average growth rate of
28%.
If the long-term earnings growth rate for tech stocks turns out to be around
20% -- roughly the midpoint of the above growth figures -- the
price-to-growth ratio on the Nasdaq 100 is nearly 4.
That can't last. When the adjustment comes, don't be surprised if Nasdaq
100 stocks fall to trade at twice that 20% growth rate, or at a P/E ratio of
40. In that case, 40 times our 2001-02 average earnings of $25.19 would
produce a Nasdaq 100 level of just over 1000, which is nearly 50% below
the current level. If the wider Nasdaq Composite Index fell by 50%, it'd be
sitting at 1110, well below the 1500 mark Detox once predicted.
When will we get to 1500? When the folly of the Fed's pump-priming
shows up in an inflation rate that the market can't ignore. Inflation is already
bobbing around five-year highs, going by the Cleveland Fed's inflation
index, arguably the fairest measure, so the market already should have
freaked. It hasn't yet, testifying to its willingness to bet everything on
Greenspan's handling of the economy. When the Fed has been discredited,
investors will have nothing left to base their optimism on. Then, the 1500
call will look bullish. |
