The New Year is starting off just like the old one ended, with stock markets on the rise.
In New York, Nasdaq cracked through the 7,000 barrier as trading resumed on Jan. 2, with tech stocks again leading the way. The Wall Street Journal reported that it only took eight months for the index to climb 1,000 points, noting we have not seen that kind of growth since the height of the dot.com bubble in 1999-2000.
We all know how that ended, with the tech sector dragging the broad market into a steep decline that lasted from the spring of 2000 until late 2002. By the time it was all over, the Nasdaq Composite had lost almost 80 per cent of its value. It took 15 years for the index to get back to its pre-crash level.
Now some doubters are suggesting that we may be on the verge of a repeat performance as the Nasdaq Composite is rising at what appears to be an unsustainable rate. It was ahead 28.2 per cent in 2017, compared to 19.4 per cent for the more diversified (but still tech heavy) S&P 500. Is another bust looming on the horizon?
Jeff Weniger, asset allocation strategist at Wisdom Tree Asset Management, suggests not. “It’s a bit of a stretch to compare this with the 2000 tech wreck,” he said in a phone interview with me. He pointed out that in 1999-2000 most high tech companies were small and highly speculative. Few were making money and some didn’t even have much revenue. It’s a different story today. The technology giants that dominate the market are all profitable and growing at an impressive rate. One of them, Apple, is the largest company in the world by market cap.
However, Nasdaq’s rapid rise has been powered by a narrow base. Five companies – Apple, Alphabet (parent of Google), Microsoft, Facebook and Amazon – contributed more than two-thirds of the points that propelled Nasdaq from 6,000 to 7,000 in such a short time. If any of them should falter, the Nasdaq story in 2018 could be far different.
The most vulnerable would appear to be Amazon. The stock has a trailing p/e ratio of over 300. Even factoring in expected big bottom line gains in 2018, the forward p/e is still a lofty 153.
Amazon is a great stock, as are all the others in this exclusive group. But when you compare its p/e ratio with Microsoft’s 29.2 and Apple’s 18.7, you have to think that investors have gone a little overboard in assessing its medium-term growth potential.
That said, they’re still buying. The shares broke through US$1,200 earlier this month. That’s a gain of 50 per cent from my original recommendation in my Internet Wealth Builder newsletter almost exactly a year ago at US$817.14.
At this point, conservative investors might want to take some of those profits off the table by selling part of their position. If you’re more aggressive and have a long time horizon, hold on. You may have to eventually ride out a pullback but long-term I think this is a US$2,000 stock.
Talk to your financial advisor before making any decisions about Amazon or any of the other mentioned stocks.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.