As tech stocks drop, remember the last bust

Fifteen years ago, the biggest and most insane valuations actually belonged to the biggest and most sane companies.

By Jim Cramer Apr 28, 2014 10:55AM

Volatile markets © jesuscm/Getty ImagesHow did it happen?


How did the market come to scorn what it loved so much? Why did the momentum names begin to peak in February and begin their monumental rollover? How did the utilities, real estate investment trusts and packaged goods stocks ascend at the same time the economic climate improved? How have the industrials remained strong despite a bond market that signals a decline in economic activity that is so needed for their earnings to improve? The Street on MSN Money


Are they all of the same piece?


Right now we are in the grips of a true collapse of the momentum stocks, where it seems like there is no floor for them.


At the same time, there appears to be no price the market won't pay for utilities. The consumer products stories go higher, depending upon their dividends and the bond market machinations. The traditional or classic growth stocks, typically valued on earnings per share, not dividends, are struggling and seem to be aimless. The industrials are case by case, with the winners, those that beat top and bottom lines, going higher, those that beat only one treading water, and those that fail to do both just collapsing to where their yield support might be.


Let's take them one at a time.


First, the momentums stocks, because they are the most under attack. You need to know the history of these stocks because it is very similar to what happened in the period leading up to the Nasdaq collapse in mid-March 2000. Not long after the crash, I examined the stocks that had been the most expensive stocks of the era. I called them Red Hots because they were red-hot momentum stocks that were going to beat the averages for you. Always remember that stocks, in the end, are just vehicles to beat the benchmark. At the time, the Nasdaq was pretty much the only game in town. If you weren't beating the S&P, you stood a very good chance of having the money taken away.


There was a prolonged period, beginning in 1998, when the highest fliers took off. But things didn't start to go nuts by traditional metrics until August 1999. Take this stroll down memory lane with some of the more prominent and, yes, profitable, momentum stocks of the era. In just a year, Ariba went from a $6 billion market capitalization to $35 billion in 2000, before bottoming at $358 million in 2002. Brocade (BRCD) ran from $7 billion to $25 billion and then back to $1.5 billion in 2002. Broadcom (BRCM) was $5 billion to $59 billion and then back to $4 billion in 2002, JDS Uniphase (JDSU) $5 billion to $114 billion and then to $3 billion in 2002, Juniper (JNPR) from $17 billion in 1999 to $40 billion in 2000 to $2.5 billion in 2002, QLogic (QLGC) from $1 billion to $12 billion and then back to $4 billion in 2002. Others had somewhat similar trajectories but took off earlier:Qualcomm (QCOM) went from $3 billion in 1998 to $54 billion in 2000 to $22 billion in 2002. VeriSign (VRSN) went from $1 billion in 1998 to $19 billion in 1999, before falling to $1.9 billion in 2002.


Many of these moves were breathtaking. In one six-month period, beginning in August 1999, Ariba rallied by 296 percent, Brocade 222 percent, Broadcom, 215 percent, JDSU 399 percent, Juniper 292 percent, Qlogic 259 percent and VeriSign 380 percent. During the same period, the S&P advanced by 3 percent. You simply had to chase performance or be crushed.


Now there were other, more egregious, nonprofitable ones that come to mind from that bizarre era. InfoSpace went from $800 million in 1998 to $15 billion in 1999 before crashing to $261 million in 2002, CMGI $1.5 billion in 1998, $11 billion in 2000 and then $161 million in 2002, ICG Group (ICGE), which wasn't public in 1998, went to $44 billion in 1999 and then $100 million in 2002. Webvan, which wasn't public in 1998, rose to $5 billion in 1999 and then crashed to nothingness with a pit stop at $200 million in 2000.


But what people forget when they get all hot under the collar about momentum tech's valuations now is that the biggest and most insane valuations actually belong to the biggest and most sane companies. Consider these. Microsoft (MSFT) went from $152 billion in 1997 to $476 billion in 1999 to $199 billion 10 years later. Intel (INTC) went from $115 billion in 1997 to $277 billion in 1999 to $78 billion nine years later, and Cisco (CSCO), $53 billion in 1997, $448 billion in 2000 and $86 billion in 2002.


In other words, don't blame the Red Hots for the wild overvaluation. But also keep in mind that while the Nasdaq ultimately brought down the S&P, it was the overvalued large tech portion of the S&P that was the true undoing, not the packaged goods, drugs or financials.


Jim Cramer headshot


Jim Cramer's Action Alerts Plus: Check out this charitable trust portfolio for the stocks Cramer thinks could be winners.





More from TheStreet

75Comments
avatar
I think Cramer is trying to tell us that stocks are way over priced right now and the stock market is about to collapse.

If so I agree.

Apr 28, 2014 11:27AM
avatar
He forgot to mention his company the street dot com ...under his leadership it went from like $70 a share or so to  the $2 level it is at now .....

How come you never put yourself on your CEO Wall of Shame bobo?
Apr 28, 2014 2:18PM
avatar

If anyone thinks Obamas actions do not have ramifications let me share a few facts with you. My mother is a devout Liberal and Obama supporter at the age of 89.  I asked her how she felt about Obama using the IRS to attack certain opposing political groups.  Her answer,  "GOOD"!.  She is certain there is a war on women by men and shows some very outward signs now of hating men. One of my neighbors is a Lesbian retired school teacher who is a devoted Obama supporter and is 69 years old.  While discussing current affairs she very calmly injected into the conversation,"we need to start killing some of these rich people".  The war on women to me is merely a political and economic ploy being used to incite anger and divide citizens into opposing groups for political profit.  There is always someone willing and in Obamas case very able to provoke citizens into actions such as these examples that are easily unAmerican at best and illegal at the worst.  Dividing a populace and encouraging hate are not unifying actions one would consider to be the role for a sitting POTUS.  But it seems our retarded Marine friend not only condones it but actively supports and contributes to this hate

Apr 28, 2014 11:47AM
avatar
You have to stop and double check the idea we are using private banks now as weapons of mass chaos and destruction.  Anyone thinking these sanctions initiated against foriegn citizens are by a private American Corporation must now be requestioned.  Is it now secretly General Jamie Dimon?  This is not good folks and will carry ramifications from other countries into board rooms like we have never seen before. Too big too fail really now means too secret to jail. How could this happen with zero citizen input?  We now have nationalized banking functions used as international weapons.  Banks and their functions have now warped and morphed into military roles.  Way too scary to have never been discussed.  JMHO
Apr 28, 2014 3:20PM
avatar
Jim Cramer loves the stock market so much that he forgets that he's talking to other people. He's like a kid going on and on about his favorite cartoon. I never know what he's babbling about...
Apr 28, 2014 2:54PM
avatar
Hmmm now liberals justify what they do by saying Bush did the same only moments after talking about how Bush did everything wrong.  And then we hear justification for todays wrongs because they were done wrong by someone else earlier and that thus makes it okay.  This shows zero principle in my mind.  Almost child like. The reason Putin seems so strong today on the world stage today is he has Principles. We appear to have none.  Americans seem to see everything in terms of Money.  I wonder why?  To a person of principle money is meaningless.  If you know you have zero principles would you respect anyone who would follow you? It is my belief Obama has little to no respect for the people who voted for him.  This was very much the same truth with Presidents Peron and Marcos.  Two other socialists who did much to control their citizens in a simlar way while in office.
Apr 28, 2014 1:33PM
Apr 28, 2014 11:24AM
avatar
Cramer letting us know there was a stock bubble in 1999 ....gee thanks Bobo ...where would us investors be without your genius to guide us ........
Apr 28, 2014 11:14AM
avatar
kinda funny to read about stocks crashing when they are up 100+ right now
Apr 28, 2014 1:41PM
avatar

There is little to no mention of anything about stocks in books on Economics.  Try reading one and you might understand.

Apr 28, 2014 11:39AM
avatar
Things are always the same only different as I see it Jim.  The one point I see that is very important I heard mentioned the other day is that we can just about be guaranteed shrinking margins from production products from the Asian rim markets.  We are beginning to see pronounced wage inflation and pressures in those areas.  This coupled with stagnant to deflating incomes here at home will without doubt put pressures on profits.  The days of 1000% markups for these Internationals; which was thievery plain and simple in my opinion to start with, will put a new reality on the bottom line and these sky high share prices will feel increased pressure as we move forward.  JMHO
Apr 28, 2014 4:16PM
avatar
Bobo got him a new sound bite........ Sounds like someone sitting on a woopy cushion but it is him making a steaming bowl of black pudding for his favorite and easiest mark....... Double V.
Apr 28, 2014 2:57PM
avatar
The "Powers" brag: They say they can control the economies of Countries; [Russia] And they can control business activity of Individuals. [Russians] sounds like the "Last Days." When do we have to wear 666 ???
Apr 28, 2014 5:14PM
avatar
Wonder if he sends Larry hate mail.......... I mean we see what he does to Jim.
Apr 28, 2014 5:08PM
avatar
He must have lost some money on a tip from Larry too.
Apr 28, 2014 1:01PM
avatar

Ahhh, back to Stocks..


Maybe Bobo is just putting out a few warnings on Tech stocks, guess they are a little volatile..?


Just like CGT's warnings of scumbags and sucker's rallies or whatever ?


Using their advice and logics, I probably shouldn't have been buying some Pipeline companies this morning on the ex-div. date....Turned out decent though, because now it's up almost 1%, with Markets running South...And we are ahead about $70 on a small purchase...

Beware who you get your advice from..

Apr 28, 2014 5:56PM
avatar

To those throwing the word "economics" around (as if they know what it means), it is my understanding:

- a "pull back" is 10% or less;"

- a "correction" is a 10% + drop;

- a "bear market" is a 20% drop top to trough.

- a "crash" is what pouring trillions of fake money (QE 1 through infinitum) into the market is where we are headed i.e.1929 +.

Apr 28, 2014 1:21PM
avatar

Classic, I have Family members that were Marines, Army and Navy, some are retired, some not.

Some not in anymore...

And I have hundreds of friends involved in all Branches of service....


But I don't get all excited, about some bullshidt written on a blogsite...

But than again I guess I don't have something to prove or disprove....?

Apr 28, 2014 3:44PM
avatar
Woo hoo the UnScumbags are taking control .....cgt must have attacked the scumbags with his lego/beanie baby army !! 
Apr 28, 2014 1:26PM
avatar

Man, this has been a "great day" in the Markets so far...

The early downside purchase we made this morning is up over 1.2 %

Thank our lucky stars for scumbags...

And a lot of other stuff is up with the DOW and others running south....Go figure.


Maybe it depends on what you own....??  hmmm....


Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

126
126 rated 1
286
286 rated 2
474
474 rated 3
680
680 rated 4
626
626 rated 5
609
609 rated 6
620
620 rated 7
462
462 rated 8
304
304 rated 9
132
132 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.