As April ended, the tech-centric Nasdaq Composite market gauge jumped 3.3% to 5092, topping the all-time high for that measure set back in March 2000. Not surprisingly, the financial press was replete with stories about the Nasdaq taking out the old highs, even as on a total return basis (i.e. including dividends and their reinvestment), the benchmark has actually gained a whopping 16.3% (not-annualized) in 15 years. Only a couple suggested that Nasdaq-5000 means that the end is nigh for equities, as most offered balanced commentary, discussing the fact that in 2000, the Nasdaq traded at a triple-digit P/E ratio versus the near-30 multiple today, with many well-known tech stocks changing hands at even lower valuations nowadays.
Indeed, The Wall Street Journal stated: “Fifteen years after peaking during the dot-com boom, the Nasdaq composite has reached a new all-time high. But this isn't the Nasdaq of Pets.com and Webvan, when companies were valued on ‘cash burn rates’ and ‘eyeballs.’ This Nasdaq, while still focused on technology companies, is a little more diversified than it was back then. And while the index, which tracks 2,500-plus stocks, has been steadily climbing since 2011, its ascent isn't the crazed surge that preceded its last record close. As the tech-mania took hold, investors pushed up the prices of all kinds of internet-related stocks. Some were never profitable and disappeared. Others, like Priceline.com and Amazon, have survived and prospered.”
Quite a contrast to what appeared in The New York Times on March 10, 2000: “As the number of shares that are rising has narrowed, pressure has grown on money managers to buy the stocks that are working and to shun the stocks that are not. That pressure has been intensified by mutual fund investors, who have pulled money out of many funds that have been poor performers while pouring cash into funds that have been rising. ‘Right now, valuation measures are being thrown out the window,’ said Phillip Coburn, a strategist at Warburg Dillon Read...He said, money managers are only being prudent when they load up on technology stocks. ‘Given the fact that I don't see the end in sight, I don't think they are being foolish,’ he said. ‘They are being practical, and they are making money for their clients.’”
Obviously we now have the benefit of hindsight to know that managers who were chasing high-flying tech stocks in March 2000 were being anything but prudent, but we especially like what our founder Al Frank wrote on the front page of TPS 401, published March 1, 2000:
Currently, the abandonment of corporate values by large numbers of market players, in the name of hoped for far off future rewards, reminds me of a snippet of Omar Khayyam/Edward FitzGerald, "Ah, take the cash and let the credit go, Nor heed the rumble of a distant drum!" In this case, "a distant drum” is from True Believers (mild-mannered fanatics) who are certain that the future will have most people rarely leave their computers and wireless devices to deal overwhelmingly with the cornucopia of commerce on the web. Never mind savage competition and more change, we have the technology and companies that will make the “old economy” look like pre-industrial revolution times or perhaps even the Middle Ages.
Just as radio did not kill the theater, nor movies the radio nor television the movies, so the Internet will not vaporize all so-called bricks-and-mortar businesses, nor perhaps be as prosperous as the fantasies of digital sugar plums dancing in the ether. Soon, the seemingly distorted course afflux will be replaced by an opposite distortion and value will again present itself as the rational touchstone.
We are coping nicely with market storms, with our share of modest triumphs and defeats, constantly preparing for the future flux to flow in our direction more consistently. In this market, where a majority of stocks are down for the year and a great many sharply off from their mid-1998 and 1999 highs, opportunities abound. They may even be seen as overwhelming. As the saying goes, "Too much of a good thing is more than enough." Today's difficulty is not finding good stocks but in selecting from among the hundreds worth owning based upon our analyses.
Al followed up those pearls of wisdom a month later with these words on the front page of TPS 402, published on April 3, 2000:
The strong Nasdaq selling in late March, except for the last day of the month, resuming on April 3, underscores our often repeated, long-term warnings about the extreme over valuations and subsequent vulnerability of many Internet and high momentum stocks. Some of these will “bounce back,” while further declines are likely as more fearful shareholders become concerned if they will ever become profitable or if the profits will ever sustain their very high market prices. Many of these corporations are not likely to survive on their own but will have to make strategic alliances (like America Online with Time Warner) to be around five or 10 years from now. In the process, their market values may drop substantially. A few will emerge successful, although probably subject to intense competition, and may not trade near their recent high prices for quite some time. Meanwhile, many “old economy” stocks, which have been beaten down irrationally, will emerge with handsome earnings and higher stock prices. At least that’s our take on the big picture.
Many people never really understand value and growth—and growth is a component of value, as is momentum from time to time—how shares of good companies tend to prosper over long periods of time. They are too concerned about market action and quarterly earnings reports or “stories” about bad of good things that might happen to stocks. Many players associate the markets with mine fields and have fear of risk or bad luck. A review of the stock market shows more good than bad chance, especially if one does a modicum of homework and allows for things to work out in the longterm. That’s been our message and practice for over 23 years. We have not changed in ugly setbacks or euphoric advances.
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Clearly, there were no guarantees back in the first trimester of 2000 that the kind of Value stocks that we have always favored would reassert their historical outperformance, but despite plenty of volatility, Al Frank’s TPS Portfolio enjoyed an average annualized rate of return of 8.6% from March 31, 2000 through March 31, 2015, compared to 4.6% per annum for the Russell 3000 Index and 4.2% per annum for the S&P 500.
And there can be no assurance that going forward Value will emerge on top, but the history books and mathematical logic would argue that today is a fine time to be considering inexpensively priced companies. After all, since 1927, Value has trumped Growth by more than 400 basis points per year...
…and given that a lot of folks are concerned about rich valuations for many stocks, we like how our portfolios shape up next to the major market averages!
If you’d like more information on why I favor a value strategy, please consider attending The Case for Value Investing in 2015 and Beyond, a free webinar I will be a guest speaker at on May 20th. By attending this webinar, you will discover my current market outlook and possible implications for long-term investors, why you can’t always trust mainstream media, and why I favor dividend-paying stocks and their role in a value-oriented portfolio. You’ll also gain access to The Prudent Speculator’s Dividend Favorites, a list of 25 dividend-paying stocks that yield at least 1.5%. Click here to register.
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Opinions expressed are those of John Buckingham, Chief Investment Officer of Al Frank Asset Management, Inc. (AFAM). a division of AFAM Capital, Inc. and editor of The Prudent Speculator newsletter and are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results or investment advice. View a complete list of all previously recommended stocks here.
AFAM Capital is an SEC registered investment advisor. AFAM Capital is editor of The Prudent Speculator newsletter and is the investment advisor to certain proprietary mutual funds and individually managed client accounts. Registration of an investment adviser does not imply any certain level of skill or training.
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