Once-frothy Nasdaq tries to reach dot-com peak

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NEW YORK (AP) — It takes a long time to recover from a bad hangover, especially when you party
like it’s 1999.TheNasdaq Composite is up 35 percent this year, but while other majorindexes like the Dow
Jones industrial average and Standard & Poor’s500 have celebrated all-time highs again and again,
the Nasdaq remains20 percent below its dot-com peak of 5,048.62.That’s a good thingbecause the biggest
beneficiary of the late 90s internet mania was alsoits biggest victim. After cresting on March 10, 2000, the
index lostnearly 80 percent of its value over the next two years, touching bottomon Oct. 9, 2002 at
1,114.11. The Dow fell 27 percent over the sameperiod, and the S&P 500 dropped 44 percent.Even as it
soarsfaster than other indexes, the Nasdaq isn’t what it was. While stilltech-heavy, it’s more diverse,
reasonably valued and loaded withprofitable companies, investors say."The Nasdaq is verydifferent, in
every measureable, quantifiable way, than it was," saysGavin Baker, who manages nearly $10 billion in
assets for the FidelityOTC fund.Technology companies make up a smaller percentage of theindex, roughly 42
percent, compared with 56 percent 13 years ago. Thetelecom industry is a little less than 2 percent,
compared with 18percent back then. And consumer-focused companies such as Amazon.com area much bigger part
of the index, making up 22 percent, compared withbasically zero in March 2000.The Nasdaq recently passed the
4,000mark, a level last seen in September of 2000. But that doesn’t mean itsstocks are back in a
dot-com-like bubble. Yes, it’s still riskier thanthe Dow and S&P 500, investors say, because it
contains hundreds ofsmall companies and is heavily exposed to technology. But it issignificantly less risky
than it was.When the bubble was at itsbiggest, the index had a price-to-earnings ratio of 194:1, which
meansinvestors were paying $194 for every $1 of earnings the companies in theindex brought in. Today, the
Nasdaq’s P/E is around 23.5, according toFactSet.What was powering its lofty valuation in the go-go years?It
was companies like Pets.com and Webvan, which were never profitableand which investors valued based on
"cash burn rates" and "eyeballs,"instead of sales and profits. Now, Pets.com and Webvan,
and thosemetrics, are dead and buried.While Nasdaq’s current rise can bepartly credited to technology
companies, these "new" tech names are muchdifferent from the ones that went public in the late
1990s.Google,a Nasdaq company, debuted in 2004 when it was already profitable.Facebook, one of the index’s
largest companies, has enjoyed solidprofits and strong revenue growth. And Apple, which has been a
publiccompany on the Nasdaq since the early 1980s, has seen mammoth growth. InMarch 2000, Apple was a $20
billion company that hadn’t released theiPod. Today, it’s worth $500 billion."These are profitable
companies with mature business models and cash flow," Baker says.Even some of the dot-com era’s biggest
busts on the Nasdaq have recovered.Priceline.com hit $975 a share in 1999, only to plunge to less than $10
three years later. It now trades at $1,189.Still,it may take a while for the Nasdaq to remove all the scar
tissue fromthe dot-com collapse. The stock market is unlikely to keep rising at itsscorching 2013 pace, so
the Nasdaq is two years away, maybe more, fromerasing all its internet bubble losses.And there are some
bigNasdaq stocks that never truly recovered. Intel and Microsoft haven’tseen much growth for a decade — and
that’s not expected to change.Worldwide PC sales are forecast to fall 10 percent in 2013 to 184million
units, according to industry tracking company IDC. WhileMicrosoft and Intel have diversified into other
businesses, sellingWindows software and computers remains Microsoft’s bread-and-butter.Intel traded for
roughly $72 a share at its height. It’s now $25. Microsoft had its dot-com peak at $58. It’s down to
$38."Theso-called ‘four horseman’ of technology — Dell, Microsoft, Cisco andIntel — are not going to be
the ones to take us to 5,000," says DanMorgan, a portfolio manager with Synovis Trust, who specializes
istechnology companies.So what will drive the Nasdaq to 5,000 if the old guard can’t?Morganexpects the
high-flyers of the last five years — Google, Apple andFacebook — to continue pushing up the Nasdaq, which
has even farther togo if it wants to reach its inflation adjusted peak of 6,845.83.Biotechnology will also
play a role, as health care now makes up 12 percent of the index’s weight.GileadSciences, maker of widely
used flu vaccine Tamiflu and HIV medicationTruvada, is now the 8th largest company in the Nasdaq and is up
morethan 3,100 percent since the index’s all-time high in March 2000.Pharmaceutical company Amgen is the
12th largest company in the index."I’m optimistic we will eventually make a new high," Baker says,
"but it’s going to take time."Copyright 2013 The Associated Press. All rightsreserved. This
material may not be published, broadcast, rewritten orredistributed.

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