FORTUNE -- The Nasdaq boosters can't be kept down: The recent selloff, they insist, is a frenzied overreaction that's serving up even better buys. On April 10, the Nasdaq composite index fell 130 points, or 3.1%, marking its largest one-day loss since Nov. 9, 2011, when it fell 3.9%.
The sharp re-pricing is well-deserved. Over time the Nasdaq will careen through spikes and valleys as usual, but the overall trajectory should be downward. In fact, the big losers in the sudden rout are precisely the stocks that grew into the most extravagantly expensive corner of the index. That group, more than any other, made the Nasdaq soar. Now it's a millstone.
The wildly overpriced stocks fall into two main areas, social networking and biotech. Let's examine the fantastic run experienced by eight companies in those categories. They're mostly the ones with the highest market caps: In social networking, the group comprises Facebook (FB), Google (GOOG), and Baidu (BID) of China; the biotech players are Alexion (ALXN), Gilead (GILD), Celgene (CELG), Biogen (BIIB), and Amgen (AMGN).
At the start of 2013, the total value of those eight stocks stood at around $570 billion, accounting for 18% of the Nasdaq 100's aggregate market cap of $3.1 trillion. (The Nasdaq 100 consists of the 100 largest companies in the overall index, ranked by market cap.)
Since then, the Nasdaq has gone on a tear, rising by 39% by April 8, the day before the selloff. But the combined value of the eight high-flyers jumped by more than 80%, more than double the overall gain in the index. Alexion rose 66%, Celgene 88%, Gilead 92%, Biogen 104%, and Facebook 122%. Only Amgen -- it gained a relatively modest 40% -- failed to beat the market by a wide margin.
By April 8, the value of those eight stocks had swelled from 18% of the Nasdaq 100's total market cap to almost one-quarter, an increase of over 6 percentage points.
And they became really, really expensive. The price-to-earnings ratios grew to 97 at Facebook and 113 at Alexion. The only company with a multiple below 28 (the number for Google) was Amgen at 17.
Over their past four quarters, the eight companies have posted combined earnings of $28 billion, vs. a combined market value of more than $1 trillion. Hence, the group, taken as a whole, is selling at 37 times profits.
If investors seek an 8% annual return from holding these volatile stocks, these companies will need a growth spurt in earnings of 15% annually for eight years, so that their profits would triple over that period. It's unlikely to happen.
The Nasdaq problem underscores a glaring weakness in cap-weighted indexes. As the prices of our eight sprinters outraced the rest of the index, a bigger and bigger share of an investor's holdings shifted to the most expensive stocks. If you kept adding money to a Nasdaq fund over that period, you were simply buying increasing portions of the overpriced stuff with every purchase.
That's the opposite of a Warren Buffett-style value strategy. Nasdaq investors are now stuck with far too much money in pricey shares that are cruisin' for a bruisin'. This crazy market is finally making a turn that makes perfect sense.
Facebook and Secret are having "talks." Could it lead to something more serious?
FORTUNE -- Secret, a mobile app that lets users share messages anonymously with their phone contacts, isn't the sort of company that should be getting acquired right now. Its product has only been in the app store for a few months, and is still getting clobbered in the download rankings by (slightly) older rival Whisper. It has absolutely no revenue and MOREDan Primack - Apr 7, 2014 5:11 PM ET
Facebook agrees to buy Oculus for more than $2 billion, just four months after VCs invested at a $200 million valuation.
FORTUNE -- We've now had about a day to digest the news that Facebook (FB) is acquiring virtual reality headset maker Oculus VR for upwards of $2.24 billion (or perhaps less, given that Facebook stock is off 6% as of this writing). Here are some notes on the deal:
ROI: This is a MOREDan Primack - Mar 26, 2014 2:21 PM ET
Despite all the media attention over mobile startups, acquisitions are actually rare. Here's what makes a mobile startup appealing to the tech giants.
By Navin Thukkaram
FORTUNE -- Last month, Facebook set the tech world ablaze with its $19 billion acquisition of messaging service WhatsApp, which is expected to reach 1 billion users in the next couple of years. Given the impressive numbers and reach, it's no surprise the company was MOREMar 25, 2014 12:39 PM ET
The social network is growing through acquisitions. But investors may want to take a second look at how they are valuing that growth.
By Lauren Silva Laughlin
FORTUNE -- Is Facebook overvalued? The social network's shareholders have fared well since the company went public in mid-2012. Shares are up more than 80% since its IPO and have climbed steadily over the last six months. But investors have paused since Mark Zuckerberg, MOREMar 5, 2014 5:00 AM ET
It could build its own driverless electric car and stay ahead of the competition for years to come.
By Mike Kwatinetz
FORTUNE -- When Facebook (FB) acquired WhatsApp last week for $19 billion, it set itself apart from earlier generation technology leaders like Apple (AAPL) and Microsoft (MSFT). Facebook has decided that it wants to own the social space now, as well as in the future, and is willing to pay an MOREMar 3, 2014 8:45 AM ET
Facebook is paying around $19 billion for WhatsApp, in the fifth-largest tech acquisition of all-time. Will it prove bargain or bust?
FORTUNE -- Earlier today I appeared on CNBC to discuss Facebook's (FB) stunning $19 billion purchase of WhatsApp, the mobile messaging platform that has grown from 200 million users to over 450 million users in just the past nine months. In short, the hosts wanted to know if it was MOREDan Primack - Feb 20, 2014 1:29 PM ET
Facebook is buying WhatsApp for $19 billion. But that's not the only important number.
FORTUNE -- Like many of you, I'm still having a hard time processing Facebook's decision to pay around $19 billion for a four year-old messaging company. In the meantime, some numbers that weren't in the press release:
That's the amount Facebook (FB) actually is paying for WhatsApp, based on today's closing stock price of $68.06 per share. MOREDan Primack - Feb 19, 2014 8:01 PM ET
Why the market jolt last week was the start of a sobering reality check for tech stocks.
FORTUNE -- Market prognosticators have conjured up many a reason for the two-day rout of stocks on Thursday and Friday, which sent the Dow Jones Industrial Average (INDU) plunging 494 points (3%) and the S&P 500 (SPX) down 55 points (3%). Some blamed the slowdown in China's perpetual manufacturing machine; others, the fears of MOREShawn Tully, senior editor-at-large - Jan 27, 2014 5:00 AM ET
Investors who are worried about Facebook's latest equity offering are overlooking the company's fundamentals.
By Sanjay Sanghoee
FORTUNE -- Shortly after Facebook's recent announcement of a new public offering worth $1.5 billion, for which Mark Zuckerberg provided 60% of the shares, Facebook stock fell amidst concerns that it is overvalued. The shares rebounded on optimism about social media, but it is a safe bet that such doubts will continue to plague the MOREJan 8, 2014 2:44 PM ET
|GM's recalled Cobalt was a failure from the start|
|Pope Francis challenges the free market - The Buzz|
|Why you should pay off your car loan ASAP|
|Americans have fallen in love with real estate once again|
|Detroit pension cuts hit civilian workers hardest|