Nasdaq nears 4000: Are tech stocks overvalued?

6:53 AM, Oct 26, 2013   |    comments
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USA TODAY - Investors are going crazy over tech stocks again, pushing the Nasdaq ever closer to 4000, but some wonder if the mania is showing signs of frothiness.

It's almost like 2000 all over again in some ways. Money-losing Internet companies are launching IPOs - this time it's online messaging company Twitter. Amazon.com's shares are soaring even as it posts a quarterly loss. Investors are clamoring to invest in search engines, driving shares of Google to record highs over $1,000 a share.

But in perhaps the most dramatic sign of the comeback of technology stocks, the Nasdaq composite index has raced to levels not seen since Sept. 8, 2000, and is approaching 4000. Powered by gains in Microsoft and Amazon shares Friday, the Nasdaq added 14.40 points to 3943.36, and has soared 31% this year.

"The animal spirits are back. The pendulum has swung from fear to greed," says Robert Maltbie of Millennium Asset Management. "If you can grow, and Microsoft, Google and Amazon have shown they can, investors will find you and buy."


The move back toward 4000 has been a major trip down memory lane for investors. The last time the index was above 4000 was Sept. 7, 2000, two months before the presidential election between George W. Bush and Al Gore. Back then, now fallen companies Enron and Lehman Bros. still existed, and shares of Internet darling Cisco Systems were nearly triple where they are now.

Investors watching tech stocks move up are noticing several key trends, including:

•Search for winners. Investors are trying to trying to locate the winners likely to capitalize on a dramatic shift to mobile devices and cloud computing, where profits could be enormous, says Colin Sebastian, analyst at Robert W. Baird. Microsoft, Amazon and Google are all well positioned to take advantage of this shift that will result in strong growth, he says. "These companies are creating news businesses and industries," he says.

•Pockets of tech enthusiasm. Few areas of technology are posting the kind of effervescent behavior as social media stocks. The basket of social networking giants Facebook and LinkedIn, online game company Zynga and online review site Angie's List and Yelp have more than doubled, on average, this year. Shares of Yelp are up 257% along this year. "Is tech in a bubble?" Maltbie says. "Some areas are."

•A relative calm when looking at the entire industry. While there are certainly cases of tech stocks that are getting ahead of reality, that's not the case with tech overall, though. It's not like investors universally are bidding up shares of all techs, says Dan Veru of Palisade Capital Management. Qualcomm, a darling for years due to its business of designing chips for mobile devices, is up 10% this year, lagging the Standard & Poor's 500.

And while investors are more interested than they were in tech stocks a year ago, they're not paying "stratospheric valuations," says Doug Sandler of Riverfront Investment Group. Tech stocks are trading for 13.9 times their forecast earnings for the next four quarters, which is tied for the third-lowest valuation of the 10 sectors tracked by S&P Capital IQ. Consumer discretionary stocks are trading for a much richer 18.5 times earnings.

"You might see a bubble in different areas, like social media," Sandler says. "But we're definitely not seeing a tech bubble."

(KUSA-TV © 2013 Multimedia Holdings Corporation)

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