Kenneth L. Fisher.
Forbes Global magazine March 6 2000
Tech stocks are in a late-stage bubble. It should break later this year.
I usually dislike "bubble", a word bandied about too often by extremists.
But I watched a bubble like this one 19 years ago, and I saw how it ended.
Right now technology stocks are just where oil stocks were in early 1981.
Recall how unstoppable energy appeared in 1980. That was a time of high
and rising inflation, booming commodity prices, OPEC's success as a cartel
and the Iran-Iraq war. By late 1980 oil was $33 a barrel, with consensus
forecasts of $100 four years out. No one envisioned oil's falling.
It's happening all over again. This time around it isn't oil's price that
is supposed to triple in four years but the population of Internet users.
Here are some other disturbing similarities. Tech's share of the S&P 500
has grown from just 6% in 1992 to 19% in 1998 and 30% in 1999. Energy's
S&P weight climbed from 7% in 1972 to 22% in 1979 to 28% at year end 1980.
You know about technology's great returns: rising 44% in 1998 and 130% in
1999. In 1979 energy stocks were up 68% and in 1980, 83%.
Then the bubble popped . The energy sector's weight fell to 23% by the end
of 1981, mostly in the second half of the year. Energy stocks lost 21% .
The S&P 500 lost 4.5%. In 1982 energy stocks fell another 19%, while the
S&P rose 21%. Since 1980 the energy sector has returned 9% a year. It has
lagged three points a year below the next-worst-performing S&P 500 sector.
Yet energy consumption has grown steadily.
Check out America's 30 largest stocks. They represent 36% of the US
market's entire value. Exactly half are tech stocks. At year end 1980
exactly half the 30 largest stocks were energy stocks. Of course, if you
believe in the demand for and the future of technology, today's weights may
make sense. But if you believe in the increasing supply of the stocks, the
weights seem skewed.
Here's another eerie similarity: Back then energy stocks sold at twice the
S&P's averaged price-to-book ratio. Today tech sells at 2.5 times the
Look at initial public offerings in 1980 and now. That year was a busy
one, with energy making up 20% of the offerings. That boosted the overall
number of US stocks by 2%. In 1999 tech made up 21% of the offerings and
again increased total stocks by 2%. While that may not sound big, it is.
Newly public companies are where the bubble breaks: when they run out of
Most initial public offerings in energy were formed to develop some
esoteric energy technology or to drill for oil in bizarre places. They
were hardly the vertically integrated giants, like Exxon, which extract,
refine and sell oil. And they weren't huge: None of 1980"s 50 largest
energy stocks was a 1979 or 1980 initial public offering. Eventually most
of the IPO's went bust. But now 11 of our 50 largest tech stocks are 1998
or 1999 initial offerings, which means the damage will be greater if any
Most new techies are as shallow in their areas as 1980"s offerings were in
energy. Who has the most Internet sales? Amazon? No. Intel, selling
chips to its customers, did more online business in 1999 than all the
dot-commies put together. Federal Express had more business on the web
than America Online and 17 times more business than Yahoo.
Most Internet stocks are merely marketing firms with no clearly defined or
probable strategy. Most Net vendors have no real gross margin in sales:
that lack is a disaster waiting to happen - later this year.
As with 1980"s energy initial offerings, these new tech companies burn
feverishly through cash, hoping to catch on with the public. Later this
year, just as happened two decades ago, dozens will run out of cash - there
are 140 now with less than 12 month's cash supply. Folks will then worry
about which will be next to run out of cash, causing many more sound stocks
to fall. Selling will run rampant in tech from small to large, hurting even
the most solid tech stocks.
I have no clue which ones will implode first. Some will float more stock
and lengthen their lease on life. But the large group of them without a
viable business model are top candidates to go down hard. I see this
happening not immediately but in the second half of 2000.
Last month I forecast a flat S&P 500 in 2000, with tech stocks down 15%. I
stand by that forecast. As 2000 progresses, you should lighten your
holdings in technology, keeping the biggest and most solid companies. This
is a year for moving forward with foreign equities while lowering your U.S.