Stocks Go Wild: Surfing the Tidal Wave
In our last column in October, we said that if there was no severe fall correction, the market would soar to new record heights by the end of the year. Here we are in December and indeed, the NASDAQ has been on a record tear, surging past the 3500 level on December 3, 1999. The rise is a record of another sort1999 is set to become the best year ever for high-tech stocks, with the NASDAQ up about 60%. Theres a reason why this is happening but well come to that later.
How is our high-tech portfolio doing? Extremely well. Some of this is dumb luck. In September, we jettisoned one of our underperforming stocks, Inacom, just before they announced an earnings disappointment that sliced 50% off the stock.
But the best news is that some of our long standing holds have paid off handsomely. Texas Instruments, Analog Devices and Nortel Networks are up 200% over two years. Analog Devices last mentioned at $14 in September 1998 is now almost $70, up a satisfying 400%. The great rises in our recent picks, especially the two-month 100% return in DSET and the 40% return in AMD are welcome but have yet to be tested.
Ironically the stocks we added to the Loser List in September have also being going great guns. The three stocks were Critical Path, Go2net and Infospace. Infospace announced a stock split, which these days is an immediate licence for a new high. Having sold short some of these stocks, the result has been personally painful. However, in recognition of ones mistakes I am going to remove these three stocks and Inktomi from the Loser List. I still believe they are wildly overvalued but they may go up a lot more before they crash. We add one new stock to the Loser List and that is Parkervision (PRKR).
The market is caught in a speculative tidal wave. The amount of money moving into technology is mind-boggling. A billion shares trade daily on the NASDAQ. Some companies have trading volumes so high that every single one of their shares will change hands in less than a week. Stocks go up by tens of dollars and even hundreds of dollars in a single day. Take the initial public offering of Akamai Technologies. The company has $1million in sales. In its first day of trading in late October it sold 9 million shares at an offering price of $26. The stock closed at $145, valuing the company around $16 billion. And yet this 458 percent increase ranks it only fourth on the list of best first-day IPO performers.
Unfortunately speculative fever has a history of grave disappointment. In the early 1960s, it was the electronics craze. There was Vulcatron, Dutron, Ashtron and Transitron. In the 1970s it was the Nifty Fifty. In the 1980s it was biotechnologythe likes of Genentech, Amgen and scores of now-forgotten "gen" companies. All of these episodes started with a seed of genuine technological innovation, moved quickly into a phase where huge premiums were paid for nothing much at all, and ended abruptly with a collapse.
I am sceptical of claims that the Internet boom is different. But I will grant one thing and that is the Internet boom is bigger than anything weve experienced this century, including the ill-fated euphoria of the twenties. The high-tech darling of the 1920s was Radio Corporation of America (RCA) which sold at a pre-crash price-to-earnings ratio of about 100. The dot.com darlings of today can easily sell at twice that. In the 1980s, some biotech companies sold for 50 times their sales. But thats dirt cheap compared to our friends at Akamai Technologies who are happily selling stock to a hungry public at 16,000 times sales.
(Lest I leave you with the impression that IPOs are the way to profits, consider this: The record holder for the best first-day IPO performance, one that beat out Akamai, was theglobe.com. This stock soared over 600% in its market debut last year, at one point reaching $97. Where is it today? It trades around $22 pre-split. So it goes. A tidal wave raises all ships, but the ones that are made of lead dont stay afloat once the excitement passes. Other lead dinghy IPOs include Earthweb and Cyberian Outpost both down about 50% from their IPO glory days.)
The uncomfortable conclusion is that when the bust comes, it will be bigger and nastier than anything within living memory. Some commentators think that a severe correction in technology will be good for the overall market. I believe the opposite. An implosion in the technology sector will take the broader market down with it. A bear crunch in technology means margin calls will force the liquidation of conservative stocks.
The Long List (prices as of December 3, 1999 in US$)
How do you surf the tidal wave without getting wiped out? Ten thoughts:
The reason why the market is hitting new highs is that we are in a phase of pure psychology now. The frantic momentum investing that used to be confined to IPOs has spread to the technology market at large. A market transfixed by momentum investing cannot rest. Huge amounts of money are ready to move the instant any stock shows some movement. That money wave makes for huge self-reinforcing surges in price levels either up or down. At the same time, the seeds of its demise are being sown. There are investors out there using high leverage to capitalize on these swings. When the momentum turns downward, we will get severe liquidation as their margin loans get called.
Some scenarios worth planning for: The NASDAQ can easily see another 30% increase in the next year which would bring it to 4500. At the same time there is a high chance of a collapse of 50% from its current level to 1500. The most likely scenario is a combination of botha rise to 4500 followed by a 70% collapse to 1500.
If you dont mind the danger, grease up your surfboard. Dont forget your lifejacket.
© Canadian MoneySaver, PO Box 370, Bath, ON K0H 1G0 613-352-7448 - Published January 2000