A new milestone for the bull market in stocks was passed this week as the technology-heavy Nasdaq Composite Index closed above the 5,000 level for the first time in 15 years.
The last visit above this level was on the way down for the Nasdaq in March 2000 as the tech bubble burst. The Nasdaq went on to lose an astonishing 90 percent of its value in just two years.
Inevitably there have been scores of comparisons this week between “then” and “now” for the Nasdaq, and times have indeed changed.
Back in 2000, the Nasdaq was priced at more than 500 times profits … profits that would prove illusory when earnings collapsed during the tech-wreck bear market that followed.
Fifteen years ago, only 68 of the 100 largest Nasdaq stocks had profits, the rest traded on metrics such as “clicks” “page-views” or “eyeballs.” Ah, those were the days: Who needs profits when you have unlimited possibilities?
Today, the Nasdaq Composite is trading at just over 30 times trailing earnings, and only 21 times this year’s expected profits; not much higher than the “old-economy” stocks in the S&P 500 Index trading at 17 times estimated earnings. Today’s valuation may be a bit on the high side, but certainly no signs of “irrational exuberance” at present.
What’s more, Nasdaq companies earn a higher valuation today because aggregate earnings for the index are poised to grow 49 percent over the next 12 months.
The most valuable company in the Nasdaq today, Apple (AAPL) is priced at just 14.4 times profits, which seems quite reasonable when you realize AAPL profits have grown more than 30 percent over the past five years.
Here’s another AAPL fun-fact to ponder. Shares have soared 73.7 percent over the past year, and last week AAPL’s market cap surpassed $770 billion — larger than the market cap of ALL the stocks listed in the S&P Small Cap 600 Index, combined!
That may seem somewhat irrational but it shows just how far some of Nasdaq’s leading stars have come since the dark days of the tech-wreck almost 15 years ago.
This fact also points out the opportunity in small-cap technology shares, new up-and-coming companies that have bright futures ahead, and yet look quite undervalued today compared with tech titans like AAPL.
In fact, small-cap tech shares have slightly outperformed larger tech companies in the S&P 500 Index so far this year, perhaps because that’s where cheaper valuations and the best opportunities can be found.
Here’s a case in point. My colleague, Mandeep Rai, editor of Top Stocks Under $10, is an expert at uncovering overlooked, low-priced stocks. One smaller tech stock he’s tracking has very big profit potential … thanks in large part to AAPL!
Amkor Technology Inc (AMKR) trades at just $9.60 a share, a far cry from AAPL’s $128 a share price, but AMKR just beat earnings forecasts with sales rising 12.9 percent to $853 million last quarter, thanks in large part to strong iPhone-related chip packaging and testing sales.
AMKR is a U.S.-based technology/semiconductor testing and packaging company that supplies companies like Intel, Toshiba and other chipmakers, and as such it is geared toward continued demand for electronics and tech products.
This outstanding stock doesn’t get the same attention as AAPL, but it’s a great way to piggy-back on AAPL’s success, and is a substantially lower-priced alternative.
Don’t forget, AAPL itself was an overlooked stock not once, but twice in its storied past. First, not long after Steve Jobs moved out of his garage and began selling the Mac; then years later when AAPL set out to reinvent itself in the pre-iPhone days.
As my colleague Jon Markman will attest, there are plenty of dynamic new technology developments on the horizon. Many of them will be pioneered by as yet unknown small cap technology companies, stocks that have the potential to become the AAPL of tomorrow.