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Like a supersonic fighter jet, the Nasdaq composite index has skyrocketed effortlessly past the 3000 mark and beyond, leaving some investors giddy.
Technology shares such as Microsoft (Nasdaq: MSFT) and Cisco Systems (Nasdaq: CSCO) have partly fueled the Nasdaq’s magic carpet ride. The index is loaded with high-growth, high-tech shares, whose soaring prices helped the Nasdaq post several record closes in late November, with few signs of letting up. As of December 6, the Nasdaq rose to a new high of 3546.01, up 62% year-to-date.
Market observers say a number of factors have helped boost the Nasdaq to its current lofty height. Chief among them: a rebound from the summer’s technology sell-off, stoked by stellar earnings reports; the pervasive influence of the Internet even in mundane businesses like groceries; and the growing consensus that Y2K-related computer problems on New Year’s Day will be minimal.
“Technology stocks have shown better relative earnings growth than the rest of the market,” says Michael Manns, vice president and senior portfolio manager with American Express Asset Management in Minneapolis. Manns, a big technology booster, explains that earlier in the year, the sector was hurt partly by fears of a technology “lockdown” related to Y2K systems failures. Those concerns have largely evaporated, however. Also, tech shares had shot up rapidly earlier this year, then were punished if their earnings reports didn’t meet expectations.
The picture for certain companies looks bright, Manns says. He thinks tech firms will benefit in the New Year because of demand for other kinds of upgrades, delayed because companies were implementing Y2K readiness programs.
Firms that offer targeted solutions to technology challenges rather than an integrated suite of software products will prosper, Manns says. He likes USWeb (Nasdaq: USWB), a San Francisco provider of intranet, extranet and Website solutions and services. The company’s revenue stream is diverse, providing everything from business plans to companies that want to get on the Internet to designing Websites. The stock has been on a roll lately, closing at $48.19 on December 6, near its 52-week high of $48.38.
Not all tech stocks will share in this boom, however. Manns says companies like Baan (Nasdaq: BAANF), a Netherlands-based provider of enterprise business management software that has in the past depended on big, multimillion-dollar contracts to provide large-scale software solutions, will have difficulty changing to a more task-specific business model. While Manns says it’s possible Baan can adapt to the needs of the marketplace, it won’t happen overnight. Baan closed at $14.56 on December 6, off its 52-week high of $17.81.
Certainly, tech stocks’ good fortune is the Nasdaq’s good fortune. But remember, it’s a volatile sector that can plunge just as steeply as it has skyrocketed, so keep the airsick bags handy.