MONEY stocks

The Fashionable Investing Trend You Should Avoid

Illustration by Taylor Callery

Value investing, the art of finding gems among beaten-down stocks, is a time-honored strategy. But recently a simple approach to value has become fashionable: Instead of hunting for bargains, buy all the stocks in the market, but “tilt” so that you own more of those with low prices relative to earnings or underlying business value. Academic research says it earns some extra return, and now lots of mutual funds and ETFs offer such statistical value plays.

So it might surprise you to learn that from 1991 to 2013, investors in value funds underper-formed the S&P 500 by close to a percentage point a year, according to an analysis of fund data by Research Affiliates.

Does this mean the value premium is overhyped?

No, it’s just misunderstood. The same study showed that value funds beat the market by nearly half a percentage point annually over this stretch. But, on average, investors in those funds didn’t capture that edge, because they traded at the wrong times, piling in when the style was hot and selling only after the funds had underperformed. So before you go after the so-called value effect, keep two things in mind.

Value Isn’t a Short-Term Play

Although there’s evidence that value works in the long run, “you can go decades where value is either in or out of favor,” says Gregg Fisher, chief investment officer for Gerstein Fisher. Indeed, growth stocks—the high-priced antithesis to value shares—largely outpaced the broad market from 1988 to 2000.

“The worst thing you can do is try to time value,” says Jason Hsu, vice chairman at Research Affiliates. If you wait to snap up such stocks until after they’ve done well, you lose part of their advantage—the low prices.

Tilt Lightly (Especially Now)

The investment community has lately gone on a tilting spree. Rick Ferri, founder of Portfolio Solutions, warns that there’s “an awful lot of money going into a small group of securities.” And there’s evidence that the market has changed as a result: The stocks with the lowest price/earnings ratios are now only 15% cheaper than those with the highest P/Es. The value discount has been closer to 35% in the past.

Ferri recommends keeping the majority of your stock portfolio in an index fund or something else that’s in line with the broad market, devoting no more than 25% to value or other kinds of tilts. And don’t do it at all unless you expect to be invested for a long time. Says Ferri: “With all this recent attention, it might take 20 or 30 years before you see the true benefits.”

MONEY stocks

The Real Reason Whole Foods Is Launching Cheap, Millennial-Friendly Stores

Whole Foods Market Inc. store, Oakland, California
David Paul Morris—Bloomberg via Getty Images Whole Foods Market

While consumers may rejoice, investors should take note: Whole Foods' plan to open a new, lower-cost chain may be a face-saving move in case its existing expansion strategy doesn't work out.

A company saying it will cater to millennials these days is like businesses putting .com in their names back in the late 1990s. It’s code for rapid expansion plans and endless potential.

Yet when Whole Foods Market WHOLE FOODS MARKET INC. WFM -0.41% announced the launch of a new chain of cheaper stores geared to the tastes of twentysomethings—who may not be able to afford to spend their “whole paycheck” on organic and naturally grown foods—Wall Street scoffed.

Whole Foods shares, in fact, sank by much as 13% (though they recovered slightly from Thursday’s lows):

WFM Price Chart

WFM Price data by YCharts

What gives?

Well, investors may be on to Whole Foods’ marketing ploy to try to turn a lemon of an organic growth strategy into artisanal lemonade.

Long before this upscale company brought up the notion of a separate, cheaper chain, it raised eyebrows by announcing a major expansion of its flagship Whole Foods stores. The natural food giant, with a reputation for high prices, plans to open 1,200 stores throughout the U.S., up from 417 today.

When the company began talking up this plan a couple of years ago, investors questioned Whole Foods’ bet on smaller markets in the Midwest and South with lower per-capita incomes than are found in current Whole Foods locations.

Those fears have become heightened lately as same-store sales growth at Whole Foods has already started to slip.

On Wednesday, the company revealed that revenues at stores open for at least one year grew just 3.6% in the quarter ended April 12, not the 5.3% that was expected. Yet the company maintained that it continues to see sufficient demand for its original strategy.

Not everyone agrees. “Personally, I question whether there can be 1,200 Whole Foods stores,” says Brian Yarbrough, an analyst with the brokerage Edward Jones who follows the natural foods company.

But this new strategy could be a way for the company to hedge its bets.

“I wonder whether at some point, after starting to roll out these new cheaper stores in 2016, they come out and say, let’s cut back on that original goal of 1,200 Whole Foods stores and instead open 500 of these smaller cheaper stores,” Yarbrough says.

Morningstar equity analyst Ken Perkins notes that the cheaper millennial-friendly stores that Whole Foods has in the works serve a couple of purposes. For starters, they are probably meant to go head-to-head with rivals like Trader Joe’s with smaller stores that have tremendous appeal to younger households.

Plus, Perkins says, “they are a way to take advantage of growth without being so tied to the higher-end demographic” catered to by the main Whole Foods stores.

But Yarbrough—who downgraded his recommendation on the stock yesterday from a “Buy” rating to a “Hold”—notes that because of the pricing strategy, these will be lower-profit-margin outlets. What’s more, the new chain may end up cannibalizing sales at existing higher-margin Whole Foods stores.

And there’s potentially an even bigger problem.

Even if the cheap stores are a hit, competitors such as Trader Joe’s or Sprouts may be forced to lower their prices to keep this new chain at bay, Yarbrough says. While that’s great for consumers, it would in turn force regular Whole Foods stores in those regions to lower their prices as well to stay relevant in the marketplace. That would have the effect of crimping profit growth for the entire company.

“For the last 15 years, Whole Foods had this natural foods space to itself,” Yarbrough says. “But now, the whole landscape is changing.”

And Whole Foods may be helping to hasten that change in a way that won’t be good for the company in the long run.

Read next: Whole Foods is Losing Its “Whole Paycheck” Reputation

MONEY mutual funds

5 Things You Didn’t Know About the World’s Biggest Bond Fund

The Vanguard Group headquarters in Malvern, Pennsylvania
Mike Mergen—Bloomberg via Getty Images The Vanguard Group headquarters in Malvern, Pennsylvania

Vanguard Total Bond Market, which is now bigger than Pimco Total Return, is a fine fund. But it doesn't quite cover all the bonds you need.

With a whopping $117 billion in assets, Vanguard Total Bond Market Index is now the biggest bond fund in the world, overtaking the long-reigning champ Pimco Total Return, according to data reported by the Wall Street Journal. If you add in the assets held by Vanguard’s exchange-traded fund version of Total Bond Market, the fund controls about $144 billion.

While big in dollar terms, this portfolio isn’t so large in scope. Here are some things you may not know about bondland’s new 800 lb. gorilla:

Despite its name, Vanguard Total Bond Market doesn’t come close to giving you exposure to the total bond market.
Sure, this fund does give you decent market exposure, but it limits that to the universe of high-quality bonds. This means the fund can own debt issued by the U.S. government, government agencies, and “investment grade” corporations with pristine credit.

Only around one tenth of 1 percent of the fund’s assets are held in high-yielding “junk” bonds issued by companies that are considered less than “investment grade.” In the bond world, higher quality issuers can get away with paying lower yields. This explains why the average yield for this fund is a modest 2%.

This fund doesn’t even give you adequate exposure to high-quality corporate bonds.
While Vanguard Total Bond Market does own high-quality corporate securities, they represent less than one quarter of the fund’s assets. With more than 75% of its assets in Treasuries and U.S. agency-related debt, this is more of a government bond fund than anything else.

This is why MONEY has recommended supplementing this fund (which is in our MONEY 50 list of recommended mutual and exchange-traded funds) with a corporate-centric portfolio, such as iShares iBoxx Investment Grade Corporate ETF (which is also in the MONEY 50).

This fund gives you extremely little foreign exposure.
Technically, Vanguard Total Bond Market does own a tiny amount of international debt. But the biggest weighting is to Canada, which makes up less than 1.7% of the fund. In fact, bonds based in the U.K, Germany, Mexico, and France each make up less than 1% of the fund’s total assets.

To really gain foreign exposure, you will have to further supplement this fund with an international fixed income fund, such as Vanguard Total International Bond Index fund, which is also in the MONEY 50.

Unlike the past champ, Pimco Total Return, this fund runs on autopilot.
As its name would indicate, Vanguard Total Bond Market Index is an index fund. This means that instead of being controlled by a star manager who picks and chooses which bonds to buy and sell, this fixed-income portfolio passively tracks a fixed-income market benchmark. In this case, that’s the Barclays Capital U.S. Aggregate Float-Adjusted Index.

Vanguard Total Bond became the biggest bond fund sort of by default.
While Total Bond has been consistently gaining investors in recent years, it didn’t win the crown so much as Pimco Total Return lost it. At its peak, Pimco Total Return wasn’t just the biggest bond fund, it was the largest mutual fund in the world. Yet after approaching nearly $300 billion, Pimco Total Return lost more than half its assets as investors fled amid infighting at Pimco which eventually led to the departure of famed fixed income manager Bill Gross. Today, Pimco Total Return is down to around $117 billion.


Are You Sure There’s No Bubble Lurking in the Nasdaq This Time?

Market data is displayed on the screens at the Nasdaq MarketSite in New York, Thursday, April 23, 2015. The Nasdaq composite has closed at a record high for the first time since the dot-com bubble of 2000.
Seth Wenig—AP Market data is displayed on the screens at the Nasdaq MarketSite in New York, Thursday, April 23, 2015. The Nasdaq composite has closed at a record high for the first time since the dot-com bubble of 2000.

Fifteen years after the tech wreck, the Nasdaq composite index has finally fully recovered and set a new record high. So is this time going to be any different?

The Nasdaq composite, that iconic index that came to symbolize the Internet economy of the late 1990s, has done something it hasn’t accomplished since Al Gore was relevant — it set a new record high.

The Nasdaq closed at 5092.08 on Friday, up slightly from the previous high of 5048.62 established on March 10, 2000. Of course, the last time the Nasdaq blazed new territory, the stock market slid into a decade-long funk, as the market spent years recovering from the euphoria and high prices created by the the tech stock mania.

This time around, investors seem convinced the Nasdaq is nowhere near bubble territory.

After all, many of the tech giants that dominated the Nasdaq’s late 1990s run — Microsoft, Intel, Cisco Systems and Oracle — now trade at P/E’s of 14 or below, making them even cheaper than the broad market.

But this recent Nasdaq run, which began five years, at the depths of the global financial panic, has been driven by an entirely different group of stocks.

Since this bull market began in March 2009, the best-performing group hasn’t been information tech, but rather biotech. And there are a few things you need to know about biotech’s spectacular run:

1) This biotech boom rivals tech’s run in the 1990s.
Biotech companies have soared more than 500% over the past five years, far outpacing the broader Nasdaq and S&P 500. That’s saying something because both indexes have had really good runs themselves.

^NBI Chart

^NBI data by YCharts

Indeed, over the past five years, the iShares Nasdaq Biotechnology ETF, which gives you exposure to the biotech stocks in the Nasdaq, returned 20 percentage points more annually than the S&P 500.

Yet unlike tech in the ’90s, biotech’s rise has gotten surprisingly little attention. Doug Ramsey, chief investment officer for The Leuthold Group, refers to the surge in biotech and healthcare in general as “one of the great stealth sector bull markets I’ve ever seen.”

2) Biotech is frothier than it looks.
The fact that Amgen and Gilead Sciences, the industry’s absolute biggest players, have generated strong earnings growth lately — and therefore trade at reasonable P/E’s — belies a bigger problem in the sector.

The next biggest companies in the Nasdaq Biotechnology Index aren’t so appealing from a valuation perspective. Regeneron Pharmaceuticals trades at a P/E of 157. Vertex Pharmaceuticals had no 2014 earnings. Biomarin Pharmaceutical had no 2014 earnings. Incyte had no 2014 earnings. Endo International had no 2014 earnings. and Jazz Pharmaceuticals sports a P/E of 286.

But the real problem isn’t even with these established names, but rather the smaller players in this industry. Among small-cap biotech names, “some valuations are absolutely obscene,” says Mike Tung, co-manager of the Turner Medical Sciences Long/Short Fund.

3) Biotech has a long history of booms and busts.
After showing major promise, biotech stocks have consistently found a way to let investors down — like in 1986, 1987, 1992, 1994, 1997-98, and pretty much from 2000 to the start of 2009.

To be sure, biotech bulls frequently cite the recent wave of mergers & acquisitions and initial public offerings in this space as an argument for why this rally has legs. But Panos Mourdoukoutas, an economics professor at Long Island University, argues that the M&A boom — and the race to get a piece of the action — may be exactly what turns a hot investment trend into an official mania.

MONEY stocks

How to Beat the Summer Market Doldrums

Matt Harrison Clough

Contrary to market lore, summer is no time to sell stocks and sit on cash, but it is a chance to adjust.

There’s an old Wall Street saying: “Sell in May and go away,” because stocks tend to do poorly in the summer. That’s been attributed to traders going on vacation, or the notion that spring bonuses on the Street stoke a buying euphoria that wears off by June. It may just be that the old saying itself creates a self-fulfilling prophecy. Because, surprisingly, there’s something to it. Since 1926 stocks have returned only around half as much from May through October as they have in the rest of the year.

The summer doldrums are nearly here. Plus, the Federal Reserve is threatening to hike interest rates, and the bull market is feeling old. So you’re probably already hearing the drumbeat telling you to sell.

Yet there’s one thing proponents of sell-in-May leave out. For practical purposes, it still doesn’t beat buying and holding. “It makes sense only if you have an alternative investment,” says Steve LeCompte, editor of And you really don’t: Even during the May–October stretch, stocks on average outpace cash and bonds. Factor in trading costs, and sell-in-May looks even worse.

Since 1871, finds LeCompte, buy-and-hold produced an annual rate of return of 8.9%, vs. 4.8% for the seasonal strategy. That doesn’t mean you must totally ignore stocks’ summer blahs, though. There are two ways to take advantage of the pattern without betting big on timing the market.

Make that “rebalance in May”

You may already be rebalancing every year or two. The logic of rebalancing is that by resetting your assets back to their original mix, you often are selling a faster-growing investment that’s gotten expensive. You don’t need to do this often when you are young and mostly in stocks anyway, but later on rebalancing helps keep a conservative portfolio conservative.

Yet if you do this near the end of the year, as many do, you may be selling stocks when they still have some pep. Rebalance in May, and you’ll give up less return in the short run. From May through October, the annualized growth rate for stocks is just 0.7 percentage points more than for bonds.

Stay away from riskier plays

While there’s no reason to bail in May, it isn’t the best time to add new risks. Sam Stovall, U.S. equity strategist for S&P Capital IQ, says the summer effect is particularly strong in economically sensitive areas like consumer discretionary stocks and small-caps. If you set aside part of your portfolio for more-speculative bets, consider coming back to it in autumn. You may find you have more bargain-priced choices. And your beach days will have been less stressful.

Read Next: How to Tame the (Inevitable) Bear Market

MONEY stocks

Why You Shouldn’t Reach to Grab New Stocks

Taylor Callery

As Shake Shack's recent slide demonstrates, while the IPO boom gives you lots of hot companies to take a flier on, you’ll most likely fall flat.

Do you regret missing out on the stunning debuts of Alibaba ALIBABA GROUP HOLDING LTD BABA 1.63% and Shake Shack SHAKE SHACK INC SHAK -4.98% ? Are you now waiting to hail Uber or snap up Snapchat when they go public, as expected?

Before you jump in, remember that when you pick a stock, you’re already taking a leap of faith—but with a newly public company, you’re taking two leaps. First, do you really know enough about the business? Second, has the market had sufficient time to draw its own conclusions so that you are buying at a fairly rational price?

“Anything that’s been trading for a while has been vetted by a whole host of investors,” says John Barr, a manager with the Needham Funds. Not so at or just after an initial public offering, and that’s why you have to tread carefully.

You’ll pay for the honeymoon

IPOs attract big headlines on day one, but surprises inevitably crop up. From 1970 to 2012, the typical IPO gained just 0.7% in its second six months, after the honeymoon effect had a chance to wear off. That’s five percentage points less than other similar-size stocks, finds Jay Ritter, a finance professor at the University of Florida. The year after that, the average IPO lagged by eight points.

Chinese e-tailer Alibaba, which soared 38% on its first day in September, is getting its dose of reality a bit ahead of schedule. Shares are down 28% lately, after the company surprisingly missed revenue-growth forecasts.

Themes get overdone

It’s easy to be lured by a story. Shake Shack doubled on its first day, thanks to the buzz surrounding high-quality fast-food chains like Chipotle CHIPOTLE MEXICAN GRILL INC. CMG -0.1% . But riding a food trend is hard. A decade ago, overexpansion killed investors’ ravenous appetite for Krispy Kreme doughnuts KRISPY KREME KKD -0.63% , and the company’s shares remain 56% off their peak.

Shake Shack has also entered a crowded battle for foodie dollars: the Habit Restaurants HABIT RESTAURANTS HABT 0.23% , Potbelly POTBELLY CORP COM USD0.01 PBPB 0.5% , and Noodles & Co. NOODLES & CO COM USD0.01 CL'A' NDLS 0.14% all went public recently, and all more than doubled in the first day. Odds are the market is overoptimistic about most of them. Since 2013, 15 stocks have doubled on day one; only two—both biotech firms—are trading above their first day’s close.

The fact is, unless you gain access to an IPO at a great price at issuance, you can’t view those stocks as buy-and-hold investments. And you should avoid any richly priced new stock altogether.

Shake Shack trades at 650 times its earnings. To justify that valuation, Ritter figures the burger chain must grow from 63 stores to nearly 700, each half as profitable as a Chipotle restaurant. That’s a big leap indeed, given that Shake Shack locations aren’t even a third as profitable at the moment.

This story was originally published in the April issue of MONEY magazine. Subscribe here.

MONEY stocks

Why Shake Shack’s Slide Was No Surprise

Andrew Kelly—Reuters Shake Shack in New York

Wall Street's love affair with upscale burgers has already hit the skids.

On Tuesday, shares of the popular burger joint Shake Shack SHAKE SHACK INC SHAK -4.98% went limp like a soggy french fry, falling as much as 9% in early morning trading Tuesday after the chain’s first financial report as a public company failed to satisfy earnings-hungry investors.

The company — which made a stunning Wall Street debut in late January — reported a net loss of $1.4 million, or 5 cents a share. Some analysts had been expecting a 2-cent-a-share loss.

In announcing the news, Shake Shack CEO Randy Garutti said “we are witnessing a seismic shift in people’s understanding and expectations of food and, for the last decade, Shake Shack has helped lead the change in consumer behavior through our fine casual approach.”

That may be true, but Wall Street’s expectations for earnings remains the same.

What was surprising about Shake Shack’s results?

The fact that the company posted a quarterly loss is no big deal. This is a new chain and investors were not expecting a big profit.

What was surprising was that management did not better prepare analysts for the results.

That’s because normally, newly public companies try to orchestrate their performance as much as possible. Jay Ritter, a finance professor at the University of Florida who specializes in IPOs, noted that in the first six months, newly public companies “neither out or underperform.”

That’s in part because companies work at making sure there are no surprises early on. “When a company goes public, analysts working for the underwriters that took the company public tend to forecast fairly conservative estimates for the first couple of quarters,” Ritter said. Meanwhile, “companies don’t want to disappoint in the first couple of quarters,” so management tends to work hard to make sure that analysts in general know what to expect.

That didn’t happen here.

What wasn’t surprising about Shake Shack’s results.

As MONEY pointed out recently, Shack Shack’s stratospheric rise on its first trading day — the stock more than doubled to $45.90 a share — set the stock up for trouble.

Before the stock dropped, the shares were trading at a price/earnings ratio of around 650. At such a lofty valuation, it’s no wonder investors were willing to punish the stock at the first sign of worse-than-expected news.

But Shake Shack is not alone on this front. In an effort to ride the red-hot “fast casual” dining trend, investors dramatically bid up the recent IPOs of The Habit Restaurants HABIT RESTAURANTS HABT 0.23% , Potbelly POTBELLY CORP COM USD0.01 PBPB 0.5% , and Noodles & Co. NOODLES & CO COM USD0.01 CL'A' NDLS 0.14% .

All three stocks doubled on the day of their recent IPOs. Yet today, all three are trading well below the closing price at the end of their first day of trading.

For food stock investors, that’s a hard lesson to swallow.

Read next: Why Shake Shack’s Slide Was No Surprise

MONEY stocks

How to Spot the Next Apple

David Paul Morris—Bloomberg via Getty Images

The lesson of the last tech bubble isn't just "don't go there." There were smart ways to buy tech in the 1990s, and there are smart ways now.

Tech investors swing for the fences and often ignore price, hoping to get in on “disrupters” that can overturn an industry. Companies don’t need profits to get steep valuations (see Twitter, Tesla, and Box). The mood now resembles that of the first dotcom era, which ended 15 years ago when the bubble burst in March 2000. But the lesson of that episode isn’t just “don’t go there.” There were smart ways to buy tech in the 1990s. Price did matter, combined with two other factors: a catalyst or a financial cushion. The same is true now. Here are three cases to illustrate the point.

Case 1: Apple’s Decisive Turn

Today Apple is the world’s biggest company, worth $683 billion. In 1997, though, Apple was a $3 billion computer maker bleeding market share. It traded at around six times earnings, vs. 20 for the S&P 500.

A cheap stock price wasn’t enough to make it a deal. “In tech, you have to have some semblance of a catalyst, because investors sooner or later demand revenue growth,” says Paul Meeks, a portfolio manager for Saturna Capital. His firm purchased Apple in 1998 at a split-adjusted price of $1.17, which it still owns today at $127.

Saturna couldn’t have seen the iPod or the iPhone coming. Its catalyst was the return of Steve Jobs, which signaled an overhaul of how Apple did business. Jobs immediately negotiated his company’s survival by getting a $150 million investment from rival Microsoft, and then jump-started research and development, which led to 1998’s hit iMac.

Case 2: Cash Saves Dell

In the early ’90s, PC maker Dell made big missteps, including a failed launch of notebook computers. At one point in 1993 the stock had lost two-thirds of its value. Dell still had a decent amount of cash on its balance sheet, though, allowing it to fight another day. That was key for Westwood Holdings’ buy decision in 1993, says chief investment officer Mark Freeman. In 1997, Dell reached Westwood’s target price with gains of about 1,700%.

Case 3: Oracle in 2015

A cheap stock that passes both the catalyst and cushion tests today is the enterprise software giant Oracle ORACLE CORPORATION ORCL 0.69% . Investors fear that new cloud-based services, which allow users to access software online, will eat into Oracle’s business. That’s held the stock at 13 times earnings. But Edward Jones analyst Bill Kreher argues that Oracle’s own cloud push could be a catalyst, allowing the company to cross-sell more to its customers. This will “bolster ongoing maintenance revenues,” he says. Meanwhile, Oracle has $40 billion in cash, a strong defense against would-be disrupters.

Read next: Who will win the battle of the tech titans?


5 Things Your Broker Won’t Tell You About Apple Joining the Dow

While the iPhone maker's inclusion in the Dow Jones Industrial Average is long overdue, the change itself doesn't really move the dial.

This morning, the Dow Jones Industrial Average finally got around to adding Apple, which means the most famous benchmark for U.S. stocks will now include the world’s most valuable and influential company.

“As the largest corporation in the world and a leader in technology, Apple is the clear choice for the Dow Jones Industrial Average,” said David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices.

The official move is expected to take place on March 19, but Apple shares are already jumping on the news. The stock was up more than 1% Friday afternoon, on a day when the Dow itself was down more than 200 points at midday.

Before you get too excited, though, there are several things you ought to know about this move:

1. Apple won’t get a meaningful long-term bounce from being in the Dow.

The Dow may be closely followed, but it’s not a market mover. That’s because while there are hundreds of index funds that track the S&P 500, there are only a handful of index funds that follow the Dow. And those funds and ETFs are tiny in comparison to the more than $5 trillion invested in S&P 500-linked portfolios.

The SPDR S&P 500 ETF, for instance, controls nearly $200 billion in assets, while its sister fund, the SPDR Dow Jones Industrial Average ETF, has only around $12 billion.

2. The Dow has a record of terrible timing when it comes to adding—or deleting—companies from its average.

Consider some of the recent moves:

In February 2008, Bank of America was added to the Dow in the midst of the mortgage crisis and global financial panic, while the tobacco giant Altria was removed. Since being kicked off the list, the defensive-oriented Altria has gained more than 139%, nearly tripling the gains for the S&P 500. Meanwhile Bank of America lost two third of its market value until it was eventually kicked out of the Dow in September 2013.

In April 2004, the insurance giant AIG was added to the Dow just a few years before the company had to be bailed out from collapse by the federal government in the global financial panic. Between then and September 2008, when AIG was removed from the Dow, the stock lost more than 90% of its value.

And then there was the classic case of being late to the party with tech. In November 1999, the Dow finally decided to add Microsoft and Intel after they both experienced astronomical runs throughout the 1990s. Since being included in the Dow, Microsoft shares are down 8% while Intel stock is 12% lower. All the while, the S&P 500 has gained ground:

^SPX Chart

^SPX data by YCharts

All of this confirms a study by University of Pennsylvania finance professor Jeremy Siegel. He looked at the performance of companies that were added to and removed from the Dow between 1957 to 2006, and found that the companies deleted from the Dow tended to outperform the new additions.

3. The Dow is a strange index to begin with.

As MONEY pointed out last year, the Dow is really an antiquated benchmark. Traditional modern indexes are “market-capitalization” weighted. What that means is that the bigger a company is, based on its market value, the greater its influence on the index. That’s why Apple, as the most valuable company in the world, comprises nearly 4% of the S&P 500, versus around 2% for Exxon Mobil, which is the market’s second biggest company.

By contrast, the Dow is a so-called price-weighted index. That means that the higher a company’s share price is—not its overall value, but the arbitrary price of a single share—the greater its sway.

Right now Visa, at around $272 a share, accounts for nearly 10% of the Dow’s movements. However, Visa announced it would split its stock in four, diminishing the value of each share but not the overall company.

Dow officials cited this as a reason for including Apple. They consider Visa a tech stock, since the company works in global payment technology. But because Visa’s meaningless stock split will nonetheless reduce the Dow’s exposure to tech, Dow officials felt the move will “make room for Apple,” Blitzer said.

4. The company that Apple is replacing is vital to Apple’s success.

Don’t think the Dow is trying to make a statement about the importance of the smartphone revolution to the U.S. economy: To make room for Apple, Dow officials kicked out AT&T.

Yet the telecom giant has been a vital cog in the smartphone era, selling data plans, iPhones, Android devices, and other technology. AT&T has already begun marketing smart watches, which is important as Apple is scheduled to unveil its Apple Watch at an event on Monday.

5. Apple doesn’t need the Dow to gain credibility.

Apple is by the far the most valuable company in the world. Just with its savings account (the cash it has on hand) the company could buy three companies that are already in the Dow outright — DuPont, Caterpillar, and the Travelers Group.

What’s more, in the past two years, Apple shares have quadrupled the gains for the Dow. And since the end of 1999, Apple has soared more than 3,000% when the Dow is up barely 50%.

AAPL Chart

AAPL data by YCharts

So you could say that the Dow needs Apple, not the other way around.

MONEY stocks

Nasdaq 5000: Three Reasons “This Time Is Different” Doesn’t Fly

The Nasdaq Marketsite digital monitor wall is seen in New York March 2, 2015. U.S. stocks advanced on Monday, with the Nasdaq moving above the 5,000 mark for the first time in 15 years, helped by technology deals and mixed data that pointed to a slowly accelerating economy.
Shannon Stapleton—Reuters The Nasdaq Marketsite digital monitor wall is seen in New York March 2, 2015. U.S. stocks advanced on Monday, with the Nasdaq moving above the 5,000 mark for the first time in 15 years, helped by technology deals and mixed data that pointed to a slowly accelerating economy.

How sure are you that the Nasdaq isn't partying like it's 1999?

For only the second time ever, the Nasdaq composite index has climbed above the 5,000 mark — 15 years after momentarily accomplishing this feat just before the tech wreck in 2000.

This has led to a chorus of articles about how things are different from a decade and a half ago.

For instance, some have argued that the Nasdaq is not the same tech-heavy index it was in the late 1990s, when tech giants like Microsoft and Cisco Systems dominated the market. Others note that the Nasdaq is a bargain compared to March 10, 2000, when it hit 5048 and the bubble burst. And still others say there is much less euphoria surrounding the tech economy than in the 1990s.


Let’s explore these arguments.

1) Yes, tech makes up slightly less of this index than it once did. But the Nasdaq is still extremely tech-centric. In March 2000, technology stocks accounted for half the Nasdaq’s stock market value, and the top holdings consisted of Cisco Systems, Microsoft, Intel, Qualcomm, and Oracle. And today? Tech is 47% of the index, and the top stocks in the index are Apple, Microsoft, Google, Intel, Facebook,, and Cisco. So have things really changed? Not so much.

2) Yes, parts of the Nasdaq are cheaper than they were in the 1990s. For instance, Microsoft, Intel and Cisco all trade at discounts to the S&P 500. But comparing today’s Nasdaq to the Nasdaq of 2000 is sort of like comparing all windy days to Hurricane Sandy. Sure, by comparison things seem calmer.

At a price/earnings ratio of 21.5, today’s Nasdaq looks “reasonably” priced compared to its once-in-a-lifetime P/E of 175 in 2000. But it’s foolish to make relative judgments against such historically extreme cases, says Greg Schultz, a principal with Asset Allocation Advisors. The fact is, at an average P/E of 21.5, the Nasdaq is still considerably more expensive than the Dow Jones industrial average, the S&P 500, European stocks, emerging market stocks, and the list goes on and on.

3) The tech economy has matured. Yes, there are mature technology companies, such as Microsoft, Cisco, and Intel, which all now cash-rich dividend-paying stocks that yield more than the broad market and trade at decent valuations. But giant mainstream computer-based tech giants are no longer the focal point of the tech economy or the Nasdaq.

Last year, Ben Inker, co-head of asset allocation at the investment firm GMO, pointed out that the euphoria had shifted to smaller health-care and biotech names. He was right. Biotech stocks such as Isis Pharmaceuticals (up 538% since 2013; no profits) and drugmaker Incyte (up 422% since 2013; no profits) are now the hottest part of the Nasdaq. Overall, the Nasdaq Biotech index now trades at P/E of around 50.

Meanwhile, many of the Nasdaq’s hottest social and streaming media stocks this year — including Twitter, Netflix — are either profitless or trading at astronomical PE’s.

And as Fortune magazine recently pointed out in its cover story, The Age of Unicorns, tech entrepreneurs and venture capitalists only seem to get excited these days if they can create startups that are instantly valued at $1 billion or more.

So how sure are you that the Nasdaq isn’t partying—at least a little—like it’s 1999?

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