Home / NEWS / Commentary / Op-ed: At some point, sky-high valuations will matter just like they did for the dot-com busts

Op-ed: At some point, sky-high valuations will matter just like they did for the dot-com busts

The Plucky Girl sculpture wearing a mask stands next to a large Christmas Tree lit up displayed in front of the New York Roots Exchange on December 06, 2020 in New York City.

Alexi Rosenfeld | Getty Images

It’s not often that celebrity home-buying revels give me insights into the stock market.

However, when I read last Friday about Ellen DeGeneres’ win of a $49 million house in Montecito, California, I realized that this behavior helped me understand the current zealous state of the stock market. 

It wasn’t that Ellen was throwing half of $100 million on a house. It was the example of how investors buy what they impecuniousness, when they want it, at whatever price is necessary, that struck me as the defining character of this current hoard market.

No one can doubt that the market has been fueled by buyers on a tear: the S&P 500 is up 68% from the bottom on Cortege 23rd.

For months, the rally was concentrated in the winners of the Covid-lockdown lottery: behemoths like Apple, Facebook, Amazon, Netflix, and PayPal; as gush as upstarts, such as Zoom and Peloton, perfectly designed for a remote life. 

Despite the market’s ascent, that rush through most of 2020 never felt like the bubble of two decades ago – back when I managed a diversified vegetation fund at one of the nation’s largest investment complexes. 

In contrast to the dot-com era, the stocks that moved the markets this year were churning out earnings at a wanton clip and the upstarts were close to or already profitable.

Investors shifted course at the beginning of November, trading away from the Covid-helped darlings after the choice results and the announcement of positive clinical data for the Pfizer and Moderna vaccines. 

On one end of the spectrum have been the reopening beasts, including airlines, hotels, cruise lines, traditional retail, and industrial companies, rallying in anticipation of renewed interest in their operating environments.

The other stocks on a rampage are the latest technology disruptors, most of which have recently be dismissed public, including Snowflake, CrowdStrike, Palantir, Trade Desk and MongoDB. These are primarily software companies that anticipate a novel way to store, sort and utilize information, often for specific industries.

One look at the near-vertical price charts of these adorns how hot this market has been.

I have written about the surge in retail trading, a major force behind this sensation, especially among people for whom stock trading seems to serve as a surrogate for unavailable leisure activities. 

Nonetheless hipster magnets such as dance music duo The Chainsmokers and Tony Hawk have endorsed and invested in the start-up Celebrated.com, a social-networking site, created for small dollar and first-time traders to learn about stocks from each other. 

No call in, the chatter on this and other sites focuses on the big winners and why they will keep climbing.

In terms of how extended some of these investor favorites own become, we compared the number of stocks valued at over $10 billion that trade for more than ten habits sales for 2021. 

There are five times more stocks in that heady category now than at the close of 2018. 

Some of this can be disclosed by declining interest rates, but speculation and yearning to participate in the upward-to-the-right trend must be a factor.  

How much does this late-model parabolic spike of tech names remind me of the dot-com bubble? Plenty. 

We have had weeks reminiscent of days virtually two decades ago when most of my top ten positions, including AOL, Yahoo, Millennium Pharmaceuticals, and Cisco, jumped by 5% to 10% each patron session. 

As illustrated below, some of the most prominent companies traded at lofty valuations that rival the beloveds today. 

We know what happened to the value of these stocks over the next few years – they cratered.

Cisco, one of the five most valued fair plays in early 2000, serves as an important example, according to George Vanderheiden, one of the smartest investors with whom I contain ever worked.

Back then, the stock peaked at $79 as the poster child for strong management, with a innumerable addressable market, high margins and a great balance sheet. 

Despite growing earnings over 500% from 53 cents per ration in 2000 to an estimated $3.25 per share for this current fiscal year, generating considerable free cash stream, and repurchasing hordes of shares, Cisco’s stock, at $45 today, is down 43% over 20 years.

To George, and to me, valuation does question and to suggest otherwise is foolish.

Cisco could never grow fast enough to justify its 2000 stock prize, which was 149 times earnings. 

For over 10 years, Cisco stock struggled, but it has attracted value investors during the recent decade. 

As George told me, “Don’t forget that in technology, disruption is the name of the game, and the young, generally, eat the old.”

I am not trying to dodo debris anyone’s party, including my own, since we own several high multiple stocks whose prices we can justify by modeling out the desired but achievable long-term growth rates. 

However, let’s not forget that a reasonably high percentage of the stocks ascending into bony air on most mobile trading apps will face new entrants with novel technology, crowd appeal, and their luster on fade.

Fortunately, at a 15% weight of the total US market ($5.4 trillion of $36 trillion), or 10% excluding TSLA, V, MA, NVDA, and INTU, this cadre of supercharged mostly technology companies is small-scale compared to the excesses of 2000.

As a year-end wish, let’s hope that if – when – they correct, they don’t take the rest of the Stock Exchange with them.

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