There aren't many tech stock investors who can look back at March 2000 fondly, especially those who bought into the hype and bet big on Internet companies with sock-puppet mascots or those promising to revolutionize toy retailing.
Fanned by unsustainable popularity of just about any stock with a ".com" in its name, the Nasdaq composite index soared to a 5,048.62 closing high on March 10, 2000. Now, 13 years later, it is 37% below that. Many of the poster-child stocks of the period, such as networking equipment firm JDS Uniphase, are a fraction of their highs. Other former headline grabbers are gone or forgotten, such as online pet supplier Pets.com and online toy seller eToys.com.
The bursting of the tech-stock bubble resulted in a massive period of wealth destruction. Yet a surprising number of companies and their investors not only escaped the carnage, but emerged as winners.
"There were business models that were not filled with air, but had superior cash flow and generated value," says David Sowerby of Loomis, Sayles.
Make no mistake: Tech stocks that have done well since 2000 are the exception. Just 55 stocks that were in the Nasdaq 100 - the exchange's most valuable non-financial firms - in March 2000 still exist as independent publicly traded companies.
So which companies survived and thrived after the dot-com crash? The Nasdaq's outliers, if you will, since 2000 fall into several areas, including:
•The category killers. Investors figured in 2000 that tech was such a fast-growing area, there was plenty of opportunity for all companies. But when tech spending slowed down, companies in hyper-competitive areas - especially in networking gear - got slammed. BroadVision, Vitesse Semiconductor, Level 3 Communications and JDS have been the worst stocks in the Nasdaq 100 that are still trading, all down more than 98%.
But the ones that defied the odds are those that fended off competition. Apple has been the top-performing Nasdaq 100 stock, rising 1,269% since 2000 as it got an early start in the mobile computing business. Similarly, Amazon and eBay dominated their fields of online retail and online auctions. Those stocks are up 297% and 127% respectively. "Amazon was squarely in the middle of the tech bubble in terms of valuation, and yet it not only survived but actually thrives," says Jack Ablin of BMO Private Bank.
•The obscure. Investors played a game of financial pile-on in 2000. Darlings such as Cisco Systems, Oracle, EMC and Sun Microsystems became household names, and individual investors jumped on not because they liked their business models, but because the stocks were rising at the time. Since then not one has paid off for investors. Cisco, Oracle and EMC are down 69%, 15% and 64% respectively.
But several Nasdaq stocks that got little notice in 2000 turned out to be the real stars, including scientific gear maker Sigma-Aldrich and Fiserv, which provides behind-the-scenes payment processing services. Sigma-Aldrich is up 600% since 2000, the best performance in the Nasdaq 100 after Apple; Fiserv had a solid 258% rise.
•The non-tech. The best way to make money in stocks sometimes is to zig when others zag. Avoiding tech was a big way to mine profits out of the Nasdaq 100 in 2000. Starbucks is the No. 3 Nasdaq 100 stock since, perking investors with a 516% gain. The coffee chain also got an unexpected jolt when its visionary founder, Howard Schultz, rejoined the company during the decade.
Other big wins that came from outside tech included retailers Dollar Tree and Bed Bath & Beyond, which rocketed 418% and 382% respectively since 2000. Dollar Tree was perversely a huge beneficiary of the recession, as consumers trimmed their budgets and looked to dollar stores for more items, including groceries. And Bed Bath & Beyond, too, benefited as the ravages of the recession caused its No. 1 direct rival, Linens 'N Things to file for bankruptcy protection. Another big winner: truck-equipment maker Paccar, up 459%.
Much has changed with the Nasdaq 100 since the 2000 high. Back then, most of its companies lost money or paid no dividends, says Dave Gedeon, managing director of global indexes at Nasdaq OMX. Today, the Nasdaq 100 trades at 16 times its earnings the past 12 months, just slightly higher than the Standard & Poor's 500. Companies in the Nasdaq 100, too, pay a 1.5% dividend yield vs. 2.1% for the S&P 500.
Yet, picking the next decade's winners doesn't mean the Nasdaq stocks that survived the tech-stock crash will be winners from here. Tech is a fast-moving area. Competitors quickly crop up. And business advantages can be fleeting.
Google, for instance, is now the No. 2 largest company on the Nasdaq 100 after Apple, and it didn't even trade until 2004. Now Google is beating Apple in the smartphone war. Meanwhile, Facebook, which wasn't founded until 2004, is attacking Google's online advertising monopoly.
The struggles within the Nasdaq 100 are just part of the rise and fall common with tech stocks. "These companies become a victim of their own success and enthusiasm inspires expectations," Ablin says. "Most of these expectations become unrealistic."