On Feb. 28, the Nasdaq-100 Index Trust (NASDAQ:QQQ), tracking the NDX, closed on the high tick of the day at $64.70. The level itself does not say much until you consider that the last time “the cubes” traded at such a price was February 2001. The 11-year highs prompted a message in my email box from a financial editor regarding my take on the on the issue du jour: Are technology stocks overbought?
My short answer: Not the right ones.
|Source: Morningstar, Thomson Financial|
“Overbought” is a nebulous concept. It means different things to different people. Short-term aggressive traders looking to scalp the next point see it one way; analysts worried about earnings and growth potential see it differently.
One thing is certain: Eleven years ago, when the QQQ was in the $60s, the composition of that ETF was very different. Apple (NASDAQ:AAPL) was barely making it and Amazon (NASDAQ:AMZN) was mired in losses, while Google (NASDAQ:GOOG) was not even public. Eleven years ago, shorting the cubes was a gift that kept on giving — and for good reasons — now only bullish strategies are paying off.
Apple sticks out like a sore thumb in the Nasdaq 100 (and the stock market in general) with a $500 billion market cap. We had similar market caps in 2000 from Cisco (NASDAQ:CSCO) and the like, but there is now one huge difference with the tech bubble — now there are profits. Tech stocks on average have little or no debt, fat operating margins and the biggest exposure to foreign exchange translation in the stock market. Since 2001, the dollar as measured by the U.S. Dollar Index is down from 120 to under 80, which has boosted foreign-generated EPS notably.
Apple trades at a P/E of less than 15 because investors cannot believe that it can keep posting such incredible growth in EPS and sales, yet quarter after quarter, management keeps delivering. The stock has had the tendency to make huge moves around earnings releases as the surprises to the upside are digested by investors. With $97 billion in cash and 54.3% EPS and 44.8% revenue growth estimated for 2012, Apple is again defying the odds and the laws of large numbers (especially if that iPad 3 turns out to be as advanced as rumored).
Google (NASDAQ:GOOG) is starting to remind me of Microsoft (NASDAQ:MSFT) as it is trying to play catch up with Facebook (with Google+) and Apple (with the Motorola Mobility takeover). Unlike Microsoft, which missed the boat on so many tech trends in the past decade, Google still is agile and does have a dominant smartphone/tablet operating system (Jobs told his biographer Isacsson it stole from the iPhone OS).
Maybe Google will make great hardware someday — those Motorola smartphones and tablets are nice — and maybe Google+ will be a success. But it seems that they themselves have been outmaneuvered at several turns lately. Still, the popularity of Android is a way to dominate the smartphone/tablet market much in the same way Windows dominated PCs back in the day, except that PCs will be running Android the way things are going pretty soon (a tablet is more or less a computer with a touchscreen keyboard), so Google likely holds long-term potential.