8 pricey stocks haunting the Nasdaq

April 11, 2014: 3:52 PM ET

Problem underscores a glaring weakness in cap-weighted indexes

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).

MORE: Greece's economy is still a huge mess

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.

MORE: JP Morgan loses money every time it makes a a mortgage

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.

  • Tech stocks may have more room to fall

    Even after the recent drop in the Nasdaq, investors are too pumped about technology stocks.

    FORTUNE -- For tech stocks, growth may no longer be coming at a reasonable price, even after the recent pull-back.

    Technology stocks are down 6% since they peaked in early March. And that drop is larger than the dip in the general market during the same time period.

    But that doesn't mean there are bargains to be had. The average MORE

    - Apr 8, 2014 5:00 AM ET
  • Will the Nasdaq soar again? Not by my math.

    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 MORE

    - Jan 27, 2014 5:00 AM ET
  • Jacob Lew perfects the art of dodging questions

    In a town where buck-passing, deflecting, and spinning is standard fare, our Treasury Secretary stands above all others. Fortune found out firsthand.

    By Adam Lashinsky, senior editor-at-large

    FORTUNE -- I interviewed Jacob Lew, President Obama's second Treasury Secretary, last Thursday. A few nights earlier I asked a roomful of businesspeople if anyone could name the man who runs fiscal policy for the world's only superpower. No one could. And so I MORE

    Aug 27, 2013 5:00 AM ET
  • Nasdaq, Bitcoin, and the failure of financial regulation

    The proliferation of trading platforms is making it increasingly difficult for regulators to keep up with the pace of financial innovation.

    FORTUNE -- A technical malfunction on Thursday that halted trading on the Nasdaq is the latest example of how financial innovation has outpaced regulation (and maybe always will).

    U.S. Securities and Exchange Commission Chairman Mary Jo White has pledged to push for the adoption of proposed automated-trading rules after system errors caused MORE

    - Aug 23, 2013 12:11 PM ET
  • What does NASDAQ meltdown mean for future IPOs?

    NASDAQ survived its last glitch. Will it be as lucky this time?

    FORTUNE -- When Facebook (FB) first tried to trade as a public company in May 2012, it didn't work. Literally. The NASDAQ machinery was overwhelmed, causing so much chaos that the exchange eventually paid out $10 million in the largest SEC penalty of its kind.

    At the time, some speculated if the Facebook experience would cause future new issuers to MORE

    - Aug 22, 2013 2:45 PM ET
    Posted in: ,
  • 4 questions for Nasdaq's private share market

    NASDAQ is putting its imprimatur on private shares trading, but several questions remain.

    FORTUNE -- The NASDAQ OMX Group this morning announced that it has formed a joint venture with SharesPost, in order to "establish the preeminent marketplace for private growth companies."

    Neither side is disclosing financial details, except that NASDAQ (NDAQ) will be majority shareholder. SharesPost founder and CEO Greg Brogger will serve as president, with the platform to launch sometime MORE

    - Mar 6, 2013 1:25 PM ET
  • Nasdaq Exec: JOBS Act not increasing IPOs

    Big week for IPOs, but don't thank The JOBS Act.

    FORTUNE -- It's now been more than five months since President Obama signed The JOBS Act, a piece of legislation that was partially designed to increase the number of initial public offerings. But Bob McCooey, head of listings for Nasdaq, says that it won't have a significant impact.

    "We have thus far seen no measurable impact," McCooey explains. "And our conversations with sponsors MORE

    - Sep 20, 2012 11:21 AM ET
    Posted in: , , ,
  • Facebook IPO blunder adds to Morgan Stanley woes

    In the past few years, Morgan Stanley has leveraged its investment bank more and more toward technology IPOs. Now its reputation in that area is in trouble.

    FORTUNE -- Add Facebook to Morgan Stanley's growing list of woes. The company's stock was falling even before last week's bungled IPO, and is now down 21% in the past month. Despite Morgan Stanley's (MS) recent disclosures showing it has  lowered its exposure to MORE

    - May 23, 2012 6:00 AM ET
  • Feds nab insider trader at Nasdaq

    Apparently Bernie Madoff wasn't the only bad apple at Nasdaq.

    In the latest shining moment for the U.S. stock exchanges, the Securities and Exchange Commission on Thursday charged Donald Johnson, a former Nasdaq managing director, with ripping off investors to the tune of $755,000 by insider trading ahead of the release of corporate press releases.

    Johnson, you will be impressed to learn, was in charge through October 2009 of the Nasdaq's "market intelligence" MORE

    - May 26, 2011 4:19 PM ET
    Posted in: , , , ,
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by VIP.