Nasdaq 1500, Here We Come

No rest till Nasdaq 1500.

Splat Nasdaq's monthlong plunge

That's where tech stocks are heading. Get ready for it. It will happen this year, maybe next. Because one thing should be clear to anyone with the most basic grasp of valuation methods: Tech stocks have to drop at least 33% from these levels to make them worth buying. Pessimism? Nope, basic science.

Bears always had the hard numbers on their side. They looked stupid because stocks kept going up. The money flows were going against them. The bulls felt confident enough to throw out the laws of investing. They saw stocks rising, and assumed all was justified. But the math behind their stock-price targets was even more corrupt than Soviet-era calculations of economic growth.

Siege of Sebastopol

The buying that fed the Nasdaq rally was based on a strange idealism that seems to frequently affect capitalism. It says perfection has been achieved in the world of business, and equities must rise to reflect that brave new state of affairs. Imagine the fun anthropologists of the future will have as they try to understand what led well-educated, already prosperous Americans to invest billions of dollars in hopeless entities like priceline (PCLN:Nasdaq - news - boards) or Amazon (AMZN:Nasdaq - news - boards).

All Done but the Shouting Nasdaq consolidates at lower levels

Remember when all those Albanians destroyed their entire economy with an enormous Ponzi scheme? We're not there yet. But if the Nasdaq had hit 6,000 before spiraling down, we'd be staring at the same Armageddon.

Now, people are selling like it's 1930. Some of the scoundrels who have coaxed people into the Nasdaq Ponzi scheme will try and say tech stocks, as a group, now offer value. Let them try. Here is why they are wrong.

Here's Why

Today, stocks in the S&P Technology Index are trading at about 28 times projected 2001 earnings. Analysts surveyed by I/B/E/S expect earnings at companies in this index to grow by 19% in 2001. That growth is now in doubt, as capital expenditure is slowing, pummeling companies like Nortel (NT:NYSE - news - boards). And consumers are spending less on tech goods, causing pain at firms like Gateway (GTW:NYSE - news - boards).

When profits projections are in doubt, a company's price-earnings ratio number shouldn't exceed its growth rate. Many other industry sectors trade on this basis; look at the banks. So, if the S&P Technology Index traded at 19 times 2001 earnings, it'd be at 958 -- a decline of 33% from the current level. Assuming the S&P tech yardstick contains many of the same companies as the Nasdaq Composite Index (neither I/B/E/S nor First Call supply index-based earnings forecasts for the Nasdaq Composite), the Nasdaq deserves to plummet by the same magnitude. That would take it to 1680.

That method's actually quite generous. Earnings could grow even less than 19%. What if tech stocks as a whole start forecasting three-year growth rates of 10% to 15%? To obtain a price-earnings ratio of 12, tech indices would have to fall by nearly 60%.

That would mean the Nasdaq trading just north of 1000. Why is that so hard to entertain? The index only crossed that level five-and-a-half years ago, traditionally but a blink on investment time horizons.

Tech-laden Janus funds say they aren't dumping tech stocks today. Why the heck not?

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Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to [e-mail].