Why the Nasdaq Stock Index is Nearing Dotcom-Era Highs

Back in the 1990s, the technology-dominated Nasdaq was best known for minting millionaires. Today, the Nasdaq is the red-headed stepchild of the U.S. stock market.

After all, the S&P has hit almost 40 new record highs in 2014. The venerable Dow Jones index has notched more than 20 new highs this year. Meanwhile, after almost 15 years, Nasdaq has yet to regain its highs.

Let’s recall some history…

On March 10, 2000, the peak of the dotcom bubble, the Nasdaq hit an all-time high of 5,049.

Then the bubble burst, wiping 80% off the value of the index.

Fast forward 15 years, and the Nasdaq is now less than 10% off its previous highs. The Nasdaq closed yesterday at 4,671.

That means there’s a good chance that by the time the Easter Bunny shows up at your doorstep in the spring of 2015, the Nasdaq will have reclaimed its prior highs. And with earnings for Nasdaq stocks forecast to grow 18% in 2015, it’s more a question of “when” and not “if.”

Today’s Nasdaq: A Different Animal

Despite its mixed reputation, today’s Nasdaq is a different animal from the days of the dotcom era.

Here’s why…

First, Nasdaq itself is a lot smaller — certainly in terms of number of companies listed. Once listing as many as 4,715 companies, acquisitions and bankruptcies have reduced that number to 2,565. It’s no longer home to every Tom, Dick and Harry tech stock with “.com” in its name. The numbers bear this out. Between 1999 and 2000, there were 630 technology initial public offerings (IPOs) on Nasdaq. The total for the next 13 years (!) combined dropped the number of technology IPOs to 462. That means it’s a lot less risky compared to when it was partying like it was 1999.

Second, Nasdaq is no longer as tech-heavy as its reputation suggests. Sure, it still has a 48% weighting in information technology. But consumer discretionary and healthcare stocks now account for 17% and 16% of the Nasdaq. The remainder is made up of boring old consumer staples, industrials and financials.

Third, Nasdaq is no longer just about the “new, new thing.” Yes, there are newish companies like Google (GOOGL) and Facebook (FB) that are changing the world. But there are also lots of well established tech-giant cash machines. At the height of the Internet boom in 2000, the median age for a newly public tech company was five. Today, it’s double that. Like a reformed teenager who turned into a 30-something responsible adult, the Nasdaq has matured.

Finally, valuations are no longer off the charts. Back in 2000, the Nasdaq index reached a price-to-sales ratio of almost 6; now it’s 2.2. Today, the Nasdaq’s price-to-earnings (P/E) ratio is 23. That compares to 175 in the bad old days — for all 4,714 stocks. If you think Nasdaq is still home to highly speculative stocks, it’s because of high-profile stocks like GoPro (GPRO), Netflix (NFLX) and LinkedIn (LNKD) whose P/E multiples range from 80 to 218. But these are the exception, not the rule.

The Unlikely Heroes of Nasdaq

There are a handful of familiar names in the Nasdaq “Top 10” from 2000. These include Cisco Systems (CSCO), Microsoft (MSFT), Intel (INTL) and Qualcomm (QCOM).

But these tech giants have not been the key to Nasdaq’s rebound. It turns out that only about 727 of the Nasdaq stocks from the 1,233 still around from back then have hit new highs, according to USA TODAY.

The single biggest winner since March 2000? A beverage company, Monster Beverage (MNST). Back in 2000, Monster, then known as Hansen’s Natural, traded for about 27 cents on a split-adjusted basis, according to S&P Capital IQ. Since then, shares have exploded 40,618% to $110.07.

Nasdaq’s second-best performer, Keurig Green Mountain (GMCR), is also a beverage company. Known as Green Mountain Coffee Roasters, it was just a sleepy maker of coffee back in 2000. Its shares traded for about 40 cents back in March 2000. Acquisition of single-cup coffee brewer Keurig in 2006 and a partnership with Starbucks (SBUX) have sent shares up 38,556%.

But the one stock most responsible for driving the Nasdaq over the past 14 years is one that wasn’t even in the Top 10.

Since 2000, that company has transformed itself from an also-ran into the world’s most valuable U.S. company. The stock is up 2,412% since March 2000.

And today, Apple (AAPL) is worth more than the entire Russian stock market.

In case you missed it, I encourage you to read my e-letter column from last week about the argument against investing in gold right now. I also invite you to comment in the space provided below my commentary.