Is the Nasdaq the New Dow?

One of the things I've been saying recently on this blog is that the Dow is full of tired companies and tired stocks. I think the Nasdaq is much more representative of the current American economy than the Dow. And when I came across this chart on Andrew Finkle's blog Thursday morning it got me thinking.

[click images to enlarge]

This shows the Dow from 1924 to 1939 and the Nasdaq from 1995 to September 2008 (two months ago). It's too bad that the red line doesn't go all the way to this week because it would be even more striking. That's because the Nasdaq traded all the way down to 1300 as of last Friday and is now at 1500. It's not exactly tracing the 1929-1939 Dow, but it sure is damn close.

So the obvious question is where did the Dow go from the early 1938 bottom?

Here's a chart that I found on the woodshedder blog:

From 1938 through the end of the war in 1945, the Dow was locked in a narrow trading range between 100 and 150 and it retested the 1938 lows in early 1942.

If the Nasdaq is the new Dow, and it sure seems like it is on many levels, then this would mean the Nasdaq will trade in the range of 1300 to 2000 for the next seven years and will retest last Friday's lows at least once more before starting a slow but steady climb sometime around 2012.

It also means that the Nasdaq isn't going much lower from here.

Now I want to say that while history does repeat itself, it's dangerous to take too much from exercises like this. They are fun and amazing at some level. But I wouldn't bet the farm based on an analysis like this.

I much prefer to think about fundamentals. The best companies in the Nasdaq, like Google (GOOG), Apple (AAPL), Amazon (AMZN), Salesforce.com (CRM), Adobe (ADBE), and others reached levels last week that strike me as big time bargains.

GOOG traded as low as $250/share on Monday. That's a market cap of $78bn and an enterprise value of $64bn. That's for a company that had operating cash flow last quarter of $2bn and certainly has the ability to earn $8bn per year of cash flow even if revenues flatten out or decline slightly. When one of the top companies in the world trades at 7.5x cash flows, that's a signal that it's time to start buying. Think of it this way. If you had the money and you could buy all of Google (I don't and you can't), you could lay out the $64bn and wait 7.5 years to get your money back and then you'd own the whole company forever after that. That's a steal in my book.

So my gut tells me we may have seen the worst of the selling in the Nasdaq for now. But it's also instructive to think about the kind of patience you'll need to have with these stocks if you buy them in here. If the crystal ball of the Dow from 1929-1945 is accurate, then at best these stocks will go up around 50% in the next seven years. That's an annual return of around 6% for the next seven years. If you are good at trading (I'm not) then of course you can do way better than that.

And of course, as I pointed out in this blog post from last week, an index is not representative of what can happen with individual stocks in it. I don't know how individual Dow stocks did from 1938 to 1945, but I am sure there were some that did way better than up 50%. My bet is companies like Google, Apple, and Amazon will outperform the Nasdaq as a whole from here on out. They are leaders in their markets, have dominant franchises, have strong balance sheets, and positive cash flow that I believe will survive the downturn intact. That's why I've been buying them and have stepped up my purchases in the past couple weeks.

I'm battered like everyone else and have not been spared the losses that most have taken for the past year. But I am optimistic and thinking about how to make money going forward. Because as my friend Fred said to a large gathering a few weeks ago, you can't leave cash under a mattress. You have to invest capital to make money. And that's what I am doing with my stock market investments, my real estate and hedge fund investments, and most importantly, with our venture capital investments.

Comments

[fg144331:]

Interesting theory...........if we only had the wisdom of 'hind sight'

2008 Nov 28 11:17 AM

[sr9web:]

So what?

Google has big earnings. But if I own GOOG shares, what do I get? Diddlysquat. No dividends. Zilch.

If you want tech, better to buy IBM in 100 share blocks - buying only on days where the market is down bad for 2-3 days in a row. You'll get several good buying opportunities per year.

Ignore moronic stocks like GOOG - owning those shares does nothing for you.

And what about all the saps that bought Google over $600 less than a year ago?

As of today, in the trailing 12 months, IBM is down 25.77%
But Google is down 57.68%

Ultra-large cap tech stocks ARE NOT hyper-growth stocks, so when you forfeit getting dividends to own them, you are being foolish.

2008 Nov 28 01:34 PM

[Foster J Fe...:]

Hmmm. It's all about the dividend, eh? Sure wish I had bought Microsoft in 85, in spite of no dividend. Would've got a whole lot more than "diddlysquat."

2008 Nov 28 02:54 PM

[mkreisel:]

In the tech sector, disruptive startups are usually the biggest threats to incumbents and long term investments.

But after a depression, most of these outfits should be wiped out and incumbents with large cash hoard should be able to pick best talents and technologies at very low cost.

2008 Nov 29 08:29 PM