By Sarah Morgan
After flirting with the milestone for days, the Nasdaq closed above 3000 today – a level last hit more than a decade ago. But many advisers say they’re still finding underpriced shares in the tech-heavy index.
The Nasdaq has gained nearly 15% so far this year, while the S&P 500 is up just under 10% and the Dow less than 7%. Valuations for the biggest companies in the index are now higher than historic averages for U.S. stocks, as SmartMoney reported when the index briefly touched 3000 on Leap Day. The 20 largest companies in the index were then trading at a median of 16 times earnings, and the 50 largest companies were trading at 20 times earnings, while the long-term average P/E for U.S. stocks is less than 15.
And yet investing pros say there’s still reason to be bullish on tech stocks and the index. For one, they point out that the move to mobile, always-connected technology and cloud computing are key drivers of the economy as a whole, with technology companies as the leaders. Tech giants like Qualcomm, Google, Oracle, Cisco, Microsoft, and Apple grew steadily during the credit crisis, and are now sitting on piles of cash, says Karl Mills, the president of advisory firm Jurika, Mills & Keifer. “They’re not selling at a premium to the broad market, so you can buy better companies with better balance sheets for the same price.”
To be sure, some advisers are taking some money off the table, noting the Nasdaq gained almost 25% over the past 5 years, compared to 5% for the Dow. “If you’re trader, this might look like a hot area to sell,” says Kim Caughey Forrest, a senior equity analyst at Fort Pitt Capital Group and a portfolio manager for the Fort Pitt Capital Total Return Fund (FPCGX). For example, CA Technologies (CA) recently saw its stock price jump after announcing an increased dividend, and Forrest says she reduced positions in that stock to keep it from becoming too large a slice of any client’s portfolio.
But even Forrest still sees good deals for investors with a longer-term focus who can sit tight through a short-term correction. She currently likes smaller-cap stocks, such as BMC Software (BMC), that supply businesses with software tools to help manage their IT systems. BMC currently trades at 14.8 times earnings, below both the S&P 500’s average of 15 and the company’s 5-year average P/E of 19.7, according to Morningstar data.